Does the Consumption CAPM Help in Accounting for Expected Currency Returns?
The Consumption Capital Asset Pricing Model (CCAPM) has been widely rejected on the basis of its implausibly large estimates of risk aversion, despite numerous modifications to its specification of risk preferences. This study instead relaxes the assumption of perfect foresight (REH), and uses survey data on traders' exchange rate forecasts to test whether the expected premium is related to the covariance between the exchange rate and consumption. The covariance is measured through the novel use of rolling-windows of the realized covariance. Interestingly, the model is able to account for expected returns with more plausible degrees of risk aversion, but only once using backward-looking rolling measures of the covariance, suggesting market participants infer about the future covariance based on experience from the recent past. There is also evidence that inclusion of the real exchange rate improves the plausibility of the estimates and the model fit.
|Date of creation:||Dec 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (860) 297 - 2485
Web page: http://www.trincoll.edu/Academics/MajorsAndMinors/Economics/Pages/default.aspx
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February.
- Froot, Kenneth A & Frankel, Jeffrey A, 1989.
"Forward Discount Bias: Is It an Exchange Risk Premium?,"
The Quarterly Journal of Economics,
MIT Press, vol. 104(1), pages 139-61, February.
- Froot, Kenneth A. & Frankel, Jeffrey A., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Department of Economics, Working Paper Series qt5w65g4zg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Kenneth A. Froot and Jeffrey A. Frankel., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Economics Working Papers 8874, University of California at Berkeley.
- Bilson, John F O, 1981.
"The "Speculative Efficiency" Hypothesis,"
The Journal of Business,
University of Chicago Press, vol. 54(3), pages 435-51, July.
- Chinn, Menzie & Frankel, Jeffrey, 1994. "Patterns in Exchange Rate Forecasts for Twenty-five Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 759-70, November.
- Ole E. Barndorff-Nielsen & Shephard, 2002.
"Econometric analysis of realized volatility and its use in estimating stochastic volatility models,"
Journal of the Royal Statistical Society Series B,
Royal Statistical Society, vol. 64(2), pages 253-280.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2000. "Econometric analysis of realised volatility and its use in estimating stochastic volatility models," Economics Papers 2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
- Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, March.
When requesting a correction, please mention this item's handle: RePEc:tri:wpaper:1317. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Setterfield)
If references are entirely missing, you can add them using this form.