| Abstract: |
We take the perspective of a US investor to assess cross-sectional differences
in 19 bilateral, conditional currency excess returns in an empirical model
that distinguishes between US-specific and global risks, conditional on US
bull (upside) or bear (downside) markets. At first glance, our results suggest
that global downside risk is compensated in average bilateral currency excess
returns. Further analysis, however, reveals that downside risk and financial
market volatility exposures are closely related. Moreover, the downside risk
evidence is mostly driven by emerging markets' currencies. We conclude that
downside risk models do not fully address the issue of foreign currency excess
returns being largely unrelated to standard risk factors. |