Currency Risk Premiums Redux

146 Pages Posted: 12 Mar 2021 Last revised: 4 May 2023

See all articles by Federico Nucera

Federico Nucera

Bank of Italy

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Gabriele Zinna

Bank of Italy

Date Written: March 16, 2023

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 premia, asset pricing, omitted factors, measurement error

JEL Classification: F31, G12, G15

Suggested Citation

Nucera, Federico and Sarno, Lucio and Zinna, Gabriele, Currency Risk Premiums Redux (March 16, 2023). Available at SSRN: https://ssrn.com/abstract=3796290 or http://dx.doi.org/10.2139/ssrn.3796290

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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