Consumption growth, uncovered equity parity and the cross-section of returns on foreign currencies
AbstractLagged foreign stock returns in excess of the U.S. stock market return are informative about quarterly exchange rate movements. A past high foreign stock return relative to the U.S. signals a foreign currency depreciation and hence low returns on the foreign currency. Conditional on stock return differentials, the consumption-based CAPM (CCAPM) explains the cross-sectional dispersion in U.S. dollar exchange rates. The CCAPM captures more than 40 percent of the variation in foreign currency returns scaled with the respective stock return differential on a country-by-country basis.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 340.
Date of creation: Nov 2007
Date of revision:
Consumption-based CAPM; foreign currency return; uncovered equity parity;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-IFN-2008-02-09 (International Finance)
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