Systematic Consumption Risk in Currency Returns

81 Pages Posted: 4 Jul 2013

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Rahel Studer-Suter

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2013

Abstract

We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return – our consumption carry factor – prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.

Keywords: Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model

JEL Classification: E44, F31, F44, G12, G15

Suggested Citation

Hoffmann, Mathias and Studer-Suter, Rahel, Systematic Consumption Risk in Currency Returns (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2289234 or http://dx.doi.org/10.2139/ssrn.2289234

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Rahel Studer-Suter

University of Zurich ( email )

Department of Economics
International Trade & Finance Group
Zurich, 8032
Switzerland

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