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Foreign Currency Returns and Systematic Risks

Published online by Cambridge University Press:  30 July 2014

Victoria Atanasov  and
Thomas Nitschka
Victoria Atanasov
Affiliation:
v.atanasov@vu.nl, VU University Amsterdam, Faculty of Economics and Business Administration, Amsterdam, 1081 HV, Netherlands and Tinbergen Institute
Thomas Nitschka*
Affiliation:
thomas.nitschka@snb.ch, Swiss National Bank, Monetary Policy Analysis, Zuerich, CH-8022, Switzerland.
*
*Corresponding author: thomas.nitschka@snb.ch
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Abstract

We apply an empirical approximation of the intertemporal capital asset pricing model (ICAPM) to show that cross-sectional dispersion in currency returns can be rationalized by differences in currency excess returns’ sensitivities to the market return’s cash-flow news component. This finding echoes recent explanations of the value and growth stock market anomaly. The distinction between cash-flow news and discount-rate news is key to jointly explain average stock and currency returns. Our analysis reveals the presence of a common source of systematic risk in stock and foreign currency returns that is reflected in the market return’s cash-flow news component.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 231 - 250
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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