@techreport{NBERw14082,
 title = "Common Risk Factors in Currency Markets",
 author = "Hanno Lustig and Nikolai Roussanov and Adrien Verdelhan",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "14082",
 year = "2008",
 month = "June",
 URL = "http://www.nber.org/papers/w14082",
 abstract = {We identify a 'slope' factor in exchange rates. High interest rate currencies load more on this slope factor than low interest rate currencies. As a result, this factor can account for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. A standard, no-arbitrage model of interest rates with two factors - a country- specific factor and a global factor - can replicate these findings, provided there is sufficient heterogeneity in exposure to the global risk factor. We show that our slope factor is a global risk factor. By investing in high interest rate currencies and borrowing in low interest rate currencies, US investors load up on global risk, particularly during bad times.},
}