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

By Hanno Lustig, A. Verdelhan. 2007

189 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/05b2f2fe390bd6b698c8f89a92865128a5a34e53

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Citations in the corpus

Commodity Trade and the Carry Trade: a Tale of Two Countries (2017, background): “In a pioneering study, Lustig and Verdelhan (2007) show that carry trade risk premia line up with loadings on the U.S. aggregate consumption growth; Lustig, Roussanov, and Verdelhan (2011) and Menkhoff, Sarno, Schmeling, and Schrimpf (2012) link these risk premia to covariances with the global…”
The Share of Systematic Variation in Bilateral Exchange Rates (2018, background): “Thus, by construction, they are silent on the share of systematic versus idiosyncratic variation in each currency pair, which is 2Following Lustig and Verdelhan (2005, 2007), DeSantis and Fornari (2008), Jurek (2008), Farhi, Fraiberger, Gabaix, Ranciere, and Verdelhan (2009), Galsband and Nitschka…”
Country Size, Currency Unions, and International Asset Returns (2012, background): “…de Medeiros, and Viceira (2007) who find that the Euro and the dollar are good hedges against the risk faced by a global equity investor, and with Lustig and Verdelhan (2007) who argue that portfolios of bonds denominated in low interest-rate currencies tend to be good hedges against US…”
Predictability of Currency Carry Trades and Asset Pricing Implications (2013, unknown): “While Newey and West (1987) p-values are presented in Table 2 to provide perspective, they are omitted thereafter.”
Volatility Risk Premia and Exchange Rate Predictability (2016, unknown): “This stands in sharp contrast with the performance of the carry 1See, for example, Lustig and Verdelhan (2007), Ang and Chen (2010), Burnside, Eichenbaum, Kleshchelski, and Rebelo (2011), Lustig, Roussanov, and Verdelhan (2011), Menkhoff, Sarno, Schmeling, and Schrimpf (2012a,b) and Barroso and Sant”