Abstract

http://ssrn.com/abstract=1571714
 
 

References (48)



 
 

Citations (20)



 


 



Countercyclical Currency Risk Premia


Hanno N. Lustig


UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)

Nikolai L. Roussanov


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Adrien Verdelhan


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

January 13, 2012

AFA 2011 Denver Meetings Paper

Abstract:     
We describe a novel currency investment strategy, the ‘dollar carry trade,’ which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for taking on aggregate risk by shorting the dollar in bad times, when the price of risk is high. The counter-cyclical variation in risk premia leads to strong return predictability: the average forward discount and U.S. industrial production growth rates forecast up to 25% of the dollar return variation at the one-year horizon.

Number of Pages in PDF File: 58

Keywords: Exchange Rates, Forecasting, Risk Premia

JEL Classification: G12, G15, F31

working papers series


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Date posted: March 18, 2010 ; Last revised: January 14, 2012

Suggested Citation

Lustig, Hanno N. and Roussanov, Nikolai L. and Verdelhan, Adrien, Countercyclical Currency Risk Premia (January 13, 2012). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1571714 or http://dx.doi.org/10.2139/ssrn.1571714

Contact Information

Hanno N. Lustig
UCLA - Anderson School of Management ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Nikolai L. Roussanov (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Adrien Verdelhan
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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