Is There a Dollar Risk Factor?

Abstract

Verdelhan (2018) argues that the dollar HML factor (long high dollar beta currencies and short low dollar beta currencies) is a priced global risk factor beyond carry. In contrast, we document that the dollar HML factor does not explain the cross section of currency risk premia, is conditionally correlated to the carry factor and does not have unconditional alpha over carry. Moreover, the dollar factor does not account for significant variation in exchange rate movements in non-dollar bilateral exchange rates.

Keywords: Exchange Rates, Dollar, Carry, Factor

JEL Classification: G12, G15