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

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  • A. 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 these excess returns are all approximately uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the returns. Their positive assessment results from allowing for a large constant in the model, and from ignoring sampling uncertainty in estimated betas used as explanatory variables in cross-sectional regressions that determine estimated consumption risk premia

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-43.

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Length: 41
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-43

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  1. 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.
  2. Hanno Lustig & Adrien Verdelhan, 2006. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk," Boston University - Department of Economics - Working Papers Series WP2006-045, Boston University - Department of Economics.
  3. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  4. A. Craig Burnside & Martin S. Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2008. "Do Peso Problems Explain the Returns to the Carry Trade?," NBER Working Papers 14054, National Bureau of Economic Research, Inc.
  5. 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.
  6. Craig Burnside, 2010. "Identification and Inference in Linear Stochastic Discount Factor Models," NBER Working Papers 16634, National Bureau of Economic Research, Inc.
  7. 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.
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Cited by:
  1. 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.
  2. Victoria Galsband & Thomas Nitschka, 2013. "Currency excess returns and global downside market risk," Working Papers 2013-07, Swiss National Bank.
  3. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.

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