Consumption growth, uncovered equity parity and the cross-section of returns on foreign currencies

Thomas Nitschka

No 340, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Lagged foreign stock returns in excess of the U.S. stock market return are informative about quarterly exchange rate movements. A past high foreign stock return relative to the U.S. signals a foreign currency depreciation and hence low returns on the foreign currency. Conditional on stock return differentials, the consumption-based CAPM (CCAPM) explains the cross-sectional dispersion in U.S. dollar exchange rates. The CCAPM captures more than 40 percent of the variation in foreign currency returns scaled with the respective stock return differential on a country-by-country basis.

Keywords: Consumption-based CAPM; foreign currency return; uncovered equity parity (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-cba and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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