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Conditional Risk Premia in Currency Markets and Other Asset Classes

Martin Lettau, Matteo Maggiori () and Michael Weber ()

No 18844, NBER Working Papers from National Bureau of Economic Research, Inc

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 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.

JEL-codes: F31 F34 G11 G12 G15 (search for similar items in EconPapers)
Date: 2013-02
Note: AP IFM
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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.

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