Download This PaperThe Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
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The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
Date Written: August 1, 2006
Abstract
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.
Keywords: Exchange Rates, Asset Pricing
JEL Classification: F31, G12
Suggested Citation: Suggested Citation
Hanno N. Lustig (Contact Author)
Stanford Graduate School of Business ( email )
Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
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Cambridge, MA 02142
United States
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