The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply

52 Pages Posted: 15 Feb 2008 Last revised: 29 Sep 2022

See all articles by Hanno N. Lustig

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Adrien Verdelhan

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

Abstract

The U.S. consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. The price of consumption risk is significantly different from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. In addition, the consumption and market betas of this investment strategy increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. We use the recent crisis as an example.

Suggested Citation

Lustig, Hanno N. and Verdelhan, Adrien and Verdelhan, Adrien, The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply (February 2008). NBER Working Paper No. w13812, Available at SSRN: https://ssrn.com/abstract=1093649

Hanno N. Lustig (Contact Author)

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Adrien Verdelhan

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Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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