Pricing Currency Risks

Mikhail Chernov, Magnus Dahlquist and Lars A. Lochstoer

No 28260, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The currency market features a relatively small cross-section and conditional expected returns can be characterized by only a few signals – interest differentials, trend, and mean-reversion. We exploit these properties to construct a conditional projection of the stochastic discount factor onto excess returns of individual currencies. Our approach is implementable in real time and prices all currencies and prominent strategies conditionally as well as unconditionally. We document that the fraction of unpriced risk in these assets is at least 85%. Extant explanations of carry strategies based on intermediary capital or global volatility are related to these unpriced components, while consumption growth is related to the priced component of returns.

JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ifn and nep-ore
Note: AP IFM
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Citations: View citations in EconPapers (1)

Published as MIKHAIL CHERNOV & MAGNUS DAHLQUIST & LARS LOCHSTOER, 2023. "Pricing Currency Risks," The Journal of Finance, vol 78(2), pages 693-730.

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Journal Article: Pricing Currency Risks (2023)
Working Paper: Pricing Currency Risks (2020)
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