“Pricing Implications of Covariances and Spreads in Currency Markets” by Dr. Thomas A. MAURER
Dr. Thomas A. MAURER
Assistant Professor of Finance
Olin Business School
Washington University in St. Louis
We introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single and multi-factor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing, which is not captured by well-known factors. The conditional covariance matrix and forward discounts are time-varying and forecast future realized currency returns.