Currency Risk Premia Redux

Federico Calogero Nucera, Lucio Sarno and Gabriele Zinna

No 18012, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study a large currency cross section using asset pricing methods which account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors which resemble (but are not identical to) a strong U.S. “Dollar†factor, and two weak, high Sharpe ratio “Carry†and “Momentum†slope factors. Evidence for an additional “Value†factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium – mostly relating to volatility, uncertainty and liquidity conditions, rather than macro variables.

Keywords: Currency; risk; premia (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2023-03
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