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.