The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
Hanno N. Lustig
UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
August 1, 2006
Banque de France Working Paper No. NER-R 155
Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.
Number of Pages in PDF File: 62
Keywords: Exchange Rates, Asset Pricing
JEL Classification: F31, G12working papers series
Date posted: October 25, 2010
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