EconPapers    
Economics at your fingertips  
 

Systematic consumption risk in currency returns

Mathias Hoffmann () and Rahel Studer-Suter

Journal of International Money and Finance, 2017, vol. 74, issue C, 187-208

Abstract: We sort currencies into portfolios by countries’ past consumption growth. The excess return of the highest- over the lowest-consumption-growth portfolio – our consumption carry factor – compensates for negative returns during world-wide downturns and prices the cross-section of portfolio-sorted and of bilateral currency returns. Empirically, sorting currencies on consumption growth is very similar to sorting currencies on interest rates. We interpret these stylized facts in a habit formation model: sorting currencies on past consumption growth approximates sorting on risk aversion. Low (high) risk-aversion currencies have high (low) interest rates and depreciate (appreciate) in times of global turmoil.

Keywords: Foreign exchange; Uncovered interest parity; Carry trade returns; Consumption risk; Asset pricing; Habit model (search for similar items in EconPapers)
JEL-codes: E44 F31 F44 G12 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560617300013
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Systematic Consumption Risk in Currency Returns (2013) Downloads
Working Paper: Systematic consumption risk in currency returns (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:74:y:2017:i:c:p:187-208

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-10-22
Handle: RePEc:eee:jimfin:v:74:y:2017:i:c:p:187-208