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Global Risks in the Currency Market

Author

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  • George Panayotov

Abstract

Global risks allow theoretical models of the currency market to explain currency risk premia. Yet, there is no consensus in the empirical literature on which factors can represent global risks. We develop an asset pricing test for global risk factors that relies on the key assumption of a distinct US global risk exposure. Using perspective-invariant test assets that are particularly suitable for studying global risks, we apply the test on a large set of factors used in recent studies of currency risk. We find that only equity market risk can represent a global risk in the currency market.

Suggested Citation

  • George Panayotov, 2020. "Global Risks in the Currency Market," Review of Finance, European Finance Association, vol. 24(6), pages 1237-1270.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:6:p:1237-1270.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa010
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    Citations

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    Cited by:

    1. Geyikçi, Utku Bora & Özyıldırım, Süheyla, 2021. "To hedge or not to hedge: Carry trade dynamics in the emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    2. Fredy Gamboa-Estrada & José Vicente Romero, 2022. "Common and idiosyncratic movements in Latin-American exchange rates," International Economics, CEPII research center, issue 171, pages 174-190.
    3. Korsaye, Sofonias Alemu & Trojani, Fabio & Vedolin, Andrea, 2023. "The global factor structure of exchange rates," Journal of Financial Economics, Elsevier, vol. 148(1), pages 21-46.
    4. Arash Aloosh & Geert Bekaert, 2022. "Currency Factors," Management Science, INFORMS, vol. 68(6), pages 4042-4064, June.
    5. Parra-Polanía, Julián & Sánchez-Jabba, Andrés & Sarmiento, Miguel, 2024. "Are FX communications effective? Evidence from emerging markets," Emerging Markets Review, Elsevier, vol. 59(C).

    More about this item

    Keywords

    Global risk factors; Currency market models; Currency carry trades;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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