Conditional Risk Premia in Currency Markets and Other Asset Classes

58 Pages Posted: 30 May 2013

See all articles by Martin Lettau

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Matteo Maggiori

New York University Stern School of Business

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 3 versions of this paper

Date Written: May 2013

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, Conditional risk premia, Cross Section of Equities and Commodities, Currency Returns, Downside Risk, Exchange Rates, UIP

JEL Classification: F31, F34, G11, G15

Suggested Citation

Lettau, Martin and Maggiori, Matteo and Weber, Michael, Conditional Risk Premia in Currency Markets and Other Asset Classes (May 2013). CEPR Discussion Paper No. DP9484. Available at SSRN: https://ssrn.com/abstract=2271935

Martin Lettau (Contact Author)

University of California - Haas School of Business ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
5106436349 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/lettau/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matteo Maggiori

New York University Stern School of Business ( email )

New York, NY
United States

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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