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

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  • Hanno Lustig
  • Adrien Verdelhan

Abstract

The 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. Consumption risk price differs significantly 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. Additionally, this investment strategy's consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. (JEL: C58, E21, F31, G11, G12)

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  • 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:aea:aecrev:v:101:y:2011:i:7:p:3477-3500
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    Cited by:

    1. Gourio, François & Siemer, Michael & Verdelhan, Adrien, 2013. "International risk cycles," Journal of International Economics, Elsevier, pages 471-484.
    2. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, Elsevier.
    3. Cosmin Ilut, 2012. "Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle," American Economic Journal: Macroeconomics, American Economic Association, pages 33-65.
    4. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
    5. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," Review of Economic Studies, Oxford University Press, pages 725-760.
    6. Emmanuel Farhi & Xavier Gabaix, "undated". "Rare Disasters and Exchange Rates," Working Paper 71001, Harvard University OpenScholar.
    7. Alexandra Janssen & Rahel Studer, 2014. "The Swiss franc's honeymoon," ECON - Working Papers 170, Department of Economics - University of Zurich, revised Jan 2017.
    8. Matteo Maggiori, 2013. "The U.S. Dollar Safety Premium," 2013 Meeting Papers 75, Society for Economic Dynamics.
    9. Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
    10. Byrne, Joseph P & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2017. "Carry Trades and Commodity Risk Factors," MPRA Paper 80789, University Library of Munich, Germany.
    11. Aidan Corcoran, 2009. "The Determinants of Carry Trade Risk Premia," The Institute for International Integration Studies Discussion Paper Series iiisdp287, IIIS.
    12. Ivanova, Yuliya & Neely, Christopher J. & Weller, Paul A., 2014. "Can risk explain the profitability of technical trading in currency markets?," Working Papers 2014-33, Federal Reserve Bank of St. Louis, revised 14 Nov 2016.
    13. Oleg Itskhoki & Dmitry Mukhin, 2017. "Exchange Rate Disconnect in General Equilibrium," NBER Working Papers 23401, National Bureau of Economic Research, Inc.
    14. S. Mouabbi, 2014. "An arbitrage-free Nelson-Siegel term structure model with stochastic volatility for the determination of currency risk premia," Working papers 527, Banque de France.
    15. Anatolyev, Stanislav & Gospodinov, Nikolay & Jamali, Ibrahim & Liu, Xiaochun, 2015. "Foreign exchange predictability during the financial crisis: implications for carry trade profitability," FRB Atlanta Working Paper 2015-6, Federal Reserve Bank of Atlanta.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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