TY  - JOUR
AU  - Lustig,Hanno
AU  - Roussanov,Nikolai
AU  - Verdelhan,Adrien
TI  - Common Risk Factors in Currency Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14082
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14082
L1  - http://www.nber.org/papers/w14082.pdf
N1  - Author contact info:
Hanno Lustig
UCLA Anderson School of Management
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-1011
Fax: 310/825-9528
E-Mail: hlustig@anderson.ucla.edu

Nikolai Roussanov
University of Pennsylvania
Wharton School,  Finance Department
2400 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6367
Tel: 215/746-0004
Fax: 215/898-6200
E-Mail: nroussan@wharton.upenn.edu

Adrien Verdelhan
MIT Sloan School of Management
100 Main Street, E62-621
Cambridge, MA 02142
Tel: 617/253-5123
E-Mail: adrienv@mit.edu
AB  - 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.
ER  -