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The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk*

* This paper has been replicated

Author

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  • Hanno Lustig
  • Adrien Verdelhan

Abstract

Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk. (JEL E21, E43, F31, G11)

Suggested Citation

  • 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.
    • Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:89-117
    Note: DOI: 10.1257/aer.97.1.89
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    Replication

    This item has been replicated by:
  • Craig Burnside, 2011. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment," American Economic Review, American Economic Association, vol. 101(7), pages 3456-3476, December.

    • More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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