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

62 Pages Posted: 25 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)

Multiple version iconThere are 2 versions of this paper

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

Lustig, Hanno N. and Verdelhan, Adrien, The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk (August 1, 2006). Banque de France Working Paper No. NER-R 155. Available at SSRN: https://ssrn.com/abstract=1697648 or http://dx.doi.org/10.2139/ssrn.1697648

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
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Stanford, CA California 94305-6072
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3108716532 (Phone)

National Bureau of Economic Research (NBER)

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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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