The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk

Hanno Lustig and Adrien Verdelhan ()

Working papers from Banque de France

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.

Keywords: Exchange Rates; Asset Pricing. (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2006
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Citations: View citations in EconPapers (27)

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https://publications.banque-france.fr/sites/defaul ... g-paper_155_2006.pdf (application/pdf)

Related works:
Journal Article: The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk (2007)
Working Paper: The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk (2006)
Working Paper: THE CROSS-SECTION OF FOREIGN CURRENCY RISK PREMIA AND CONSUMPTION GROWTH RISK (2005)
Working Paper: The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:155

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