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

27 Pages Posted: 5 Oct 2010  

Hanno N. Lustig

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

Adrien Verdelhan

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

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Date Written: September 3, 2010

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, The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply (September 3, 2010). Available at SSRN: https://ssrn.com/abstract=1687187 or http://dx.doi.org/10.2139/ssrn.1687187

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

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Adrien Verdelhan

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

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United States

National Bureau of Economic Research (NBER) ( email )

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