Demand Propagation Through Traded Risk Factors
Professor Amy Wang Huber
Assistant Professor in Finance
The Wharton School
The University of Pennsylvania
We show that three traded risk factors—Dollar, Carry, and Euro-Yen—propagate demand shocks across currencies. Identified using a novel approach that combines trading and return data, these factors explain 90% of the non-diversifiable risk intermediaries bear in currency trading. IV estimates show that factor prices rise by 5–30 basis points per $1 billion of demand. A demand shock to one currency changes demand for these risk factors, affecting their prices and prices of other currencies with shared exposures. Non-currency assets are also exposed to these risks, allowing demand shocks to propagate across markets through shared currency risk.
