The International CAPM Redux

We provide evidence that international equity investors are compensated for bearing currency risk. Three factors --- a global equity factor denominated in local currencies, and two currency factors, dollar and carry --- account for a wide cross-section of equity returns from 46 developed and emerging countries from 1976 to the present. They are also useful at explaining the risks of international mutual funds and hedge funds. A simple complete-markets model replicates our empirical findings. The model implies a novel perspective on optimal currency hedging.