scholarly journals The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Comment

2007 ◽  
Author(s):  
A. Craig Burnside
Keyword(s):  
Cross Section ◽  
Foreign Currency ◽  
Risk Premia ◽  
Currency Risk ◽  
Consumption Growth ◽  
The Cross

scholarly journals The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply

2011 ◽  
Vol 101 (7) ◽  
pp. 3477-3500 ◽  
Author(s):  
Hanno Lustig ◽  
Adrien Verdelhan
Keyword(s):  
Interest Rate ◽  
Cross Section ◽  
Foreign Currency ◽  
Investment Strategy ◽  
Risk Premia ◽  
Currency Risk ◽  
Sampling Uncertainty ◽  
Consumption Growth ◽  
High Interest Rate ◽  
High Interest

The 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. Consumption risk price differs significantly 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. Additionally, this investment strategy's consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. JEL: C58, E21, F31, G11, G12

scholarly journals The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment

2011 ◽  
Vol 101 (7) ◽  
pp. 3456-3476 ◽  
Author(s):  
Craig Burnside
Keyword(s):  
Foreign Currency ◽  
Risk Premia ◽  
Expected Returns ◽  
Stochastic Discount Factor ◽  
Forward Premium Puzzle ◽  
Cross Sectional ◽  
Consumption Growth ◽  
Forward Premium ◽  
The Cross ◽  
Premium Puzzle

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency “compensate US investors for taking on more US consumption growth risk,” yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. JEL: C58, E21, F31, G11, G12

scholarly journals The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk

2007 ◽  
Vol 97 (1) ◽  
pp. 89-117 ◽  
Author(s):  
Hanno Lustig ◽  
Adrien Verdelhan
Keyword(s):  
Interest Rate ◽  
Cross Section ◽  
Foreign Currency ◽  
Risk Premia ◽  
Excess Returns ◽  
Consumption Growth ◽  
High Interest Rate ◽  
Aggregate Consumption ◽  
High Interest ◽  
The Interest Rate

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)

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