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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
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Working Paper: Systematic Consumption Risk in Currency Returns (2013) Downloads
Working Paper: Systematic consumption risk in currency returns (2013) Downloads
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DOI: 10.1016/j.jimonfin.2017.01.001

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