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

  • Hanno Lustig
  • Adrien Verdelhan

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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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
Note: AP IFM
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