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

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  • Lustig, H.
  • Verdelhan, A.

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.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 155.

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Length: 51 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:155

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Exchange Rates ; Asset Pricing.;

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