Skip to main content Accessibility help

Foreign Currency Returns and Systematic Risks

  • Victoria Atanasov (a1) and Thomas Nitschka (a2)


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.


Corresponding author

*Corresponding author:


Hide All
Akram, F. Q.; Rime, D.; and Sarno, L.. “Arbitrage in the Foreign Exchange Market: Turning on the Microscope.” Journal of International Economics, 76 (2008), 237253.
Asness, C. S.; Moskowitz, T. J.; and Pedersen, L. H.. “Value and Momentum Everywhere.” Journal of Finance, 68 (2013), 929985.
Backus, D. K.; Foresi, S.; and Telmer, C. I.. “Affine Term Structure Models and the Forward Premium Anomaly.” Journal of Finance, 56 (2001), 279304.
Bansal, R., and Dahlquist, M.. “The Forward Premium Puzzle: Different Tales from Developed and Emerging Markets.” Journal of International Economics, 51 (2000), 115144.
Bansal, R., and Shaliastovich, I.. “A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets.” Review of Financial Studies, 26 (2013), 133.
Bianchi, F. “Rare Events, Agents’ Expectations, and the Cross-Section of Asset Returns.” Working Paper, Duke University (2011).
Burnside, C. “Carry Trades and Risk.” In Handbook of Exchange Rates, James, J., Marsh, I. W., and Sarno, L., eds. Hoboken, NJ: John Wiley & Sons (2012).
Campbell, J. Y. “A Variance Decomposition for Stock Returns.” Economic Journal, 101 (1991), 157179.
Campbell, J. Y. “Intertemporal Asset Pricing Without Consumption Data.” American Economic Review, 83 (1993), 487512.
Campbell, J. Y.; Giglio, S.; and Polk, C.. “Hard Times.” Review of Asset Pricing Studies, 3 (2013), 95132.
Campbell, J. Y., and Shiller, R. J.. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1988a), 195228.
Campbell, J. Y., and Shiller, R. J.. “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance, 43 (1988b), 661676.
Campbell, J. Y., and Vuolteenaho, T.. “Bad Beta, Good Beta.” American Economic Review, 94 (2004), 12491275.
Chen, L., and Zhao, X.. “Return Decomposition.” Review of Financial Studies, 22 (2009), 52135249.
Christiansen, C.; Ranaldo, A.; and Söderlind, P.. “The Time-Varying Systematic Risk of Carry Trade Strategies.” Journal of Financial and Quantitative Analysis, 46 (2011), 11071125.
Colacito, R., and Croce, M. M.. “Risks for the Long Run and the Real Exchange Rate.” Journal of Political Economy, 119 (2011), 153181.
Epstein, L. G., and Zin, S. E.. “Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework.” Econometrica, 57 (1989), 937969.
Epstein, L. G., and Zin, S. E.. “Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis.” Journal of Political Economy, 99 (1991), 263286.
Fama, E. F. “Forward and Spot Exchange Rates.” Journal of Monetary Economics, 14 (1984), 319338.
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.
Fama, E. F., and French, K. R.. “Value versus Growth: The International Evidence.” Journal of Finance, 53 (1998), 19751999.
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.
Farhi, E., and Gabaix, X.. “Rare Disasters and Exchange Rates.” Working Paper, Harvard University, National Bureau of Economic Research, and New York University (2011).
Hansen, L. P., and Hodrick, R. J.. “Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis.” Journal of Political Economy, 88 (1980), 829853.
Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (1965), 1337.
Lustig, H.; Roussanov, N.; and Verdelhan, A.. “Common Risk Factors in Currency Markets.” Review of Financial Studies, 24 (2011), 37313777.
Lustig, H., and Verdelhan, A.. “Investing in Foreign Currency Is Like Betting on Your Intertemporal Marginal Rate of Substitution.” Journal of the European Economic Association, 4 (2006), 644655.
Lustig, H., and Verdelhan, A.. “The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk.” American Economic Review, 97 (2007), 89117.
Menkhoff, L.; Sarno, L.; Schmeling, M.; and Schrimpf, A.. “Carry Trades and Global Foreign Exchange Volatility.” Journal of Finance, 67 (2012), 681718.
Merton, R. C. “An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867887.
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.
Nitschka, T. “Cashflow News, the Value Premium and an Asset Pricing View on European Stock Market Integration.” Journal of International Money and Finance, 29 (2010), 14061423.
Patton, A. J., and Timmermann, A.. “Monotonicity in Asset Returns: New Tests with Applications to the Term Structure, the CAPM, and Portfolio Sorts.” Journal of Financial Economics, 98 (2010), 605625.
Politis, D. N., and Romano, J. P.. “The Stationary Bootstrap.” Journal of American Statistical Association, 89 (1994), 13031313.
Ranaldo, A., and Söderlind, P.. “Safe Haven Currencies.” Review of Finance, 14 (2010), 385407.
Shanken, J. “On the Estimation of Beta-Pricing Models.” Review of Financial Studies, 5 (1992), 155.
Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425442.
Sharpe, W. F. “Mutual Fund Performance.” Journal of Business, 39 (1966), 119138.
Verdelhan, A. “A Habit-Based Explanation of the Exchange Rate Risk Premium.” Journal of Finance, 65 (2010), 123146.
Verdelhan, A. “The Share of Systematic Risk in Bilateral Exchange Rates.” Working Paper, Massachusetts Institute of Technology and National Bureau of Economic Research (2012).
Weil, P. “The Equity Premium Puzzle and the Risk-Free Rate Puzzle.” Journal of Monetary Economics, 24 (1989), 401421.
Yogo, M. “A Consumption-Based Explanation of Expected Stock Returns.” Journal of Finance, 61 (2006), 539580.

Related content

Powered by UNSILO

Foreign Currency Returns and Systematic Risks

  • Victoria Atanasov (a1) and Thomas Nitschka (a2)


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed.