The article "Common Risk Factors in Currency Markets" by Lustig, Roussanov, and Verdelhan identifies a "slope" factor in exchange rates, where high-interest rate currencies load more on this factor than low-interest rate currencies. This factor accounts for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. The authors show that a standard no-arbitrage model of interest rates with two factors – a country-specific factor and a global factor – can replicate these findings, provided there is sufficient heterogeneity in exposure to global or common innovations. They find that the slope factor is related to changes in global equity market volatility, suggesting that US investors load up on global risk by investing in high-interest rate currencies and borrowing in low-interest rate currencies. The paper also documents the failure of the uncovered interest rate parity (UIP) condition in both time series and cross-section, and provides evidence that the slope factor captures the common risk that explains the carry trade returns. The authors derive conditions for stochastic discount factors to match the currency portfolio returns and refine the conditions derived by Backus, Foresi, and Telmer for replicating the forward premium anomaly. The results support a risk-based view of exchange rate determination and highlight the importance of global risk factors in international finance.The article "Common Risk Factors in Currency Markets" by Lustig, Roussanov, and Verdelhan identifies a "slope" factor in exchange rates, where high-interest rate currencies load more on this factor than low-interest rate currencies. This factor accounts for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. The authors show that a standard no-arbitrage model of interest rates with two factors – a country-specific factor and a global factor – can replicate these findings, provided there is sufficient heterogeneity in exposure to global or common innovations. They find that the slope factor is related to changes in global equity market volatility, suggesting that US investors load up on global risk by investing in high-interest rate currencies and borrowing in low-interest rate currencies. The paper also documents the failure of the uncovered interest rate parity (UIP) condition in both time series and cross-section, and provides evidence that the slope factor captures the common risk that explains the carry trade returns. The authors derive conditions for stochastic discount factors to match the currency portfolio returns and refine the conditions derived by Backus, Foresi, and Telmer for replicating the forward premium anomaly. The results support a risk-based view of exchange rate determination and highlight the importance of global risk factors in international finance.