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Systematic consumption risk in currency returns

  • Mathias Hoffmann
  • Rahel Suter

We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 124.

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Date of creation: Jun 2013
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Handle: RePEc:zur:econwp:124
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