Conditional Risk Premia in Currency Markets and Other Asset Classes

Martin Lettau, Matteo Maggiori and Michael Weber

No 9484, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Carry trade; Commodity basis; Equity cross section; Downside risk (search for similar items in EconPapers)
JEL-codes: F31 F34 G11 G15 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Conditional risk premia in currency markets and other asset classes (2014)
Working Paper: Conditional Risk Premia in Currency Markets and Other Asset Classes (2013)
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