Systematic consumption risk in currency returns
Mathias Hoffmann () and
No 124, ECON - Working Papers from Department of Economics - University of Zurich
We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies 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)
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-mac and nep-opm
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Journal Article: Systematic consumption risk in currency returns (2017)
Working Paper: Systematic Consumption Risk in Currency Returns (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:124
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