Abstract
Sorting countries by their dollar currency betas produces a novel cross-section of average currency excess returns. A slope factor (long in high beta currencies and short in low beta currencies) accounts for this cross-section of currency risk premia. This slope factor is orthogonal to the high-minus-low carry trade factor built from portfolios of countries sorted by their interest rates. The two high-minus-low risk factors account for 18% to 80% of the monthly exchange rate movements. The two risk factors suggest that stochastic discount factors in complete markets' models should feature at least two global shocks to describe exchange rates.
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