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

Author

Listed:
  • Hanno Lustig

    (UCLA/NBER)

  • Adrien Verdelhan

    () (Department of Economics, Boston University)

Abstract

Aggregate consumption growth risk explains why low interest rate curren- cies do not appreciate as much as the interest rate di®erential and why high interest rate currencies do not depreciate as much as the interest rate di®er- ential. 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 appreci- ate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.

Suggested Citation

  • 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.
  • Handle: RePEc:bos:wpaper:wp2006-045
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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