Currency risk premiums redux?

Federico C. Nucera (), Lucio Sarno and Gabriele Zinna ()
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Federico C. Nucera: Bank of Italy
Gabriele Zinna: Bank of Italy

No 1415, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 premiums; asset pricing; omitted factors; measurement error; weak factors (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-ifn and nep-rmg
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Related works:
Journal Article: Currency Risk Premiums Redux (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1415_23

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