Conditional risk premia in currency markets and other asset classes

Martin Lettau, Matteo Maggiori and Michael Weber

Journal of Financial Economics, 2014, vol. 114, issue 2, 197-225

Abstract: The downside risk capital asset pricing model (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.

Keywords: Carry trade; Commodity basis; Downside risk; Equity cross section (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (177)

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Related works:
Working Paper: Conditional Risk Premia in Currency Markets and Other Asset Classes (2013)
Working Paper: Conditional Risk Premia in Currency Markets and Other Asset Classes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:114:y:2014:i:2:p:197-225

DOI: 10.1016/j.jfineco.2014.07.001

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