Global Macro Risks in Currency Excess Returns

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We study a cross section of carry-trade-generated currency excess returns in terms of their exposure to global fundamental macroeconomic risk. The cross-country high-minuslow (HML) conditional skewness of the unemployment gap—our measure of global macroeconomic uncertainty—is a factor that is robustly priced in currency excess returns. A widening of the HML gap signifies increasing divergence, disparity and inequality of economic performance across countries.

JEL Code(s): E, E2, E21, E4, E43, F, F3, F31, G, G1, G12