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

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  • Hanno Lustig
  • Adrien Verdelhan

Abstract

The U.S. consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. The price of consumption risk is significantly different from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. In addition, the consumption and market betas of this investment strategy increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. We use the recent crisis as an example.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13812.

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Date of creation: Feb 2008
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Publication status: published as Hanno Lustig & Adrien Verdelhan, 2011. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply," American Economic Review, American Economic Association, vol. 101(7), pages 3477-3500, December.
Handle: RePEc:nbr:nberwo:13812

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Cited by:
  1. Aidan Corcoran, 2009. "The Determinants of Carry Trade Risk Premia," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp287, IIIS.
  2. Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc.
  3. Matteo Maggiori, 2013. "The U.S. Dollar Safety Premium," 2013 Meeting Papers, Society for Economic Dynamics 75, Society for Economic Dynamics.
  4. Victoria Galsband & Thomas Nitschka, 2013. "Currency excess returns and global downside market risk," Working Papers 2013-07, Swiss National Bank.
  5. 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.
  6. Gourio, François & Siemer, Michael & Verdelhan, Adrien, 2013. "International risk cycles," Journal of International Economics, Elsevier, Elsevier, vol. 89(2), pages 471-484.
  7. Rahel Studer-Suter & Alexandra Janssen, 2014. "The Swiss franc's honeymoon," ECON - Working Papers, Department of Economics - University of Zurich 170, Department of Economics - University of Zurich.

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