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Conditional Risk Premia in Currency Markets and Other Asset Classes

  • Martin Lettau
  • Matteo Maggiori
  • Michael Weber

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 rationalize the cross section of equity, equity index options, 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18844.

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Date of creation: Feb 2013
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Publication status: published as Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
Handle: RePEc:nbr:nberwo:18844
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