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The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment

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  • Craig Burnside

Abstract

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. (JEL: C58, E21, F31, G11, G12)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 7 (December)
Pages: 3456-76

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:7:p:3456-76

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  1. Ravi Jagannathan & Zhenyu Wang, 1998. "An Asymptotic Theory for Estimating Beta-Pricing Models Using Cross-Sectional Regression," Journal of Finance, American Finance Association, vol. 53(4), pages 1285-1309, 08.
  2. Raymond Kan & Chu Zhang, 1999. "Two-Pass Tests of Asset Pricing Models with Useless Factors," Journal of Finance, American Finance Association, vol. 54(1), pages 203-235, 02.
  3. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
  4. Craig Burnside, 2010. "Identification and Inference in Linear Stochastic Discount Factor Models," NBER Working Papers 16634, National Bureau of Economic Research, Inc.
  5. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  6. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011. "Do Peso Problems Explain the Returns to the Carry Trade?," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 853-891.
  7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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Cited by:
  1. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.
  2. Martin Lettau & Matteo Maggiori & Michael Weber, 2013. "Conditional Risk Premia in Currency Markets and Other Asset Classes," NBER Working Papers 18844, National Bureau of Economic Research, Inc.
  3. Victoria Galsband & Thomas Nitschka, 2013. "Currency excess returns and global downside market risk," Working Papers 2013-07, Swiss National Bank.

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