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Conditional Risk Premia in Currency Markets and Other Asset Classes

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  • Lettau, Martin
  • Maggiori, Matteo
  • Weber, Michael

Abstract

The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.

Suggested Citation

  • Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2013. "Conditional Risk Premia in Currency Markets and Other Asset Classes," CEPR Discussion Papers 9484, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9484
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    More about this item

    Keywords

    Carry trade; Commodity basis; Equity cross section; Downside risk;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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