American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk
American Economic Review
vol. 97,
no. 1, March 2007
(pp. 89–117)
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. (JEL E21, E43, F31, G11)Citation
Lustig, Hanno, and Adrien Verdelhan. 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk." American Economic Review, 97 (1): 89–117. DOI: 10.1257/aer.97.1.89Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E43 Interest Rates: Determination, Term Structure, and Effects
- F31 Foreign Exchange
- G11 Portfolio Choice; Investment Decisions
- G15 International Financial Markets