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Systematic consumption risk in currency returns

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  • Mathias Hoffmann
  • Rahel Suter

Abstract

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.

Suggested Citation

  • Mathias Hoffmann & Rahel Suter, 2013. "Systematic consumption risk in currency returns," ECON - Working Papers 124, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:124
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    Cited by:

    1. Victoria Atanasov, 2014. "Common Risk Factors in Equity Markets," Tinbergen Institute Discussion Papers 14-070/IV, Tinbergen Institute.
    2. Hutchinson, Mark C. & Kyziropoulos, Panagiotis E. & O'Brien, John & O'Reilly, Philip & Sharma, Tripti, 2022. "Are carry, momentum and value still there in currencies?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    4. Alexandra Janssen & Rahel Studer, 2014. "The Swiss franc's honeymoon," ECON - Working Papers 170, Department of Economics - University of Zurich, revised Jan 2017.
    5. Dahlquist, Magnus & Hasseltoft, Henrik, 2020. "Economic momentum and currency returns," Journal of Financial Economics, Elsevier, vol. 136(1), pages 152-167.
    6. Nucera, Federico, 2017. "Unemployment fluctuations and the predictability of currency returns," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 88-106.

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    More about this item

    Keywords

    Foreign exchange; uncovered interest parity; carry trade returns; consumption risk; asset pricing; habit model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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