This paper suggests a factor model for carry trade strategies wherethe regression coeffcients are allowed to depend on market volatility and liquid-ity. Empirical results on daily data from 1995 to 2008 show that a typical carrytrade strategy has much higher exposure to the stock market and also...

Stein’s lemma is extended to the case where asset returns have skewed and leptokurticdistributions. The risk premium is still the negative of the covariance of theexcess return with the log SDF.[...] Paul Söderlind]