Systematic Consumption Risk in Currency Returns
Copyright policy )Systematic Consumption Risk in Currency Returns
We sort currencies into portfolios by countries’ past consumption growth. The excess return of the highest- over the lowest-consumption-growth portfolio – our consumption carry factor – compensates for negative returns during world-wide downturns and prices the cross-section of portfolio-sorted and of bilateral currency returns. Empirically, sorting currencies on consumption growth is very similar to sorting currencies on interest rates. We interpret these stylized facts in a habit formation model: sorting currencies on past consumption growth approximates sorting on risk aversion. Low (high) risk-aversion currencies have high (low) interest rates and depreciate (appreciate) in times of global turmoil.
- University of Zurich Switzerland
- Australian National University Australia
- National University United States
- Center for Economic Studies Germany
Consumption risk, Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model, 2002 Economics and Econometrics, Carry trade returns, ECON Department of Economics, Kapitalmarkttheorie, 10007 Department of Economics, carry trade returns, foreign exchange, G12, Zinsparität, Uncovered interest parity, F31, uncovered interest parity, ddc:330, G15, consumption risk, asset pricing, Asset pricing, Wechselkurs, 330 Economics, Foreign exchange, 2003 Finance, Portfoliomanagement, habit model, Habit model, foreign exchange, carry trade returns, consumption risk, asset pricing, E44, F44, Verbrauch, jel: jel:E44, jel: jel:F44, jel: jel:F31, jel: jel:G12, jel: jel:G15
Consumption risk, Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model, 2002 Economics and Econometrics, Carry trade returns, ECON Department of Economics, Kapitalmarkttheorie, 10007 Department of Economics, carry trade returns, foreign exchange, G12, Zinsparität, Uncovered interest parity, F31, uncovered interest parity, ddc:330, G15, consumption risk, asset pricing, Asset pricing, Wechselkurs, 330 Economics, Foreign exchange, 2003 Finance, Portfoliomanagement, habit model, Habit model, foreign exchange, carry trade returns, consumption risk, asset pricing, E44, F44, Verbrauch, jel: jel:E44, jel: jel:F44, jel: jel:F31, jel: jel:G12, jel: jel:G15
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