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

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Craig Burnside

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Abstract

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet these excess returns are all approximately uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the returns. Their positive assessment results from allowing for a large constant in the model, and from ignoring sampling uncertainty in estimated betas used as explanatory variables in cross-sectional regressions that determine estimated consumption risk premia.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13129.

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Date of creation: May 2007
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Handle: RePEc:nbr:nberwo:13129

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F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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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.:
  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  2. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, 04. [Downloadable!] (restricted)
  3. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March. [Downloadable!]
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  4. Hanno Lustig & Adrien Verdelhan, 2004. "The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk," 2004 Meeting Papers 136c, Society for Economic Dynamics. [Downloadable!]
  5. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(1), pages 1-33. [Downloadable!] (restricted)
  6. Ravi Jagannathan & Zhenyu Wang, 1998. "An Asymptotic Theory for Estimating Beta-Pricing Models Using Cross-Sectional Regression," Journal of Finance, American Finance Association, vol. 53(4), pages 1285-1309, 08. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. A. Craig Burnside, 2007. "Empirical Asset Pricing and Statistical Power in the Presence of Weak Risk Factors," NBER Working Papers 13357, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Tarek A. Hassan, 2009. "Country Size, Currency Unions, and International Asset Returns," Working Papers 154, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  4. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2009. "Carry Trades and Global FX Volatility," MPRA Paper 14728, University Library of Munich, Germany. [Downloadable!]
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