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American Economic Review: Vol. 101 No. 7 (December 2011)

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

Article Citation

Burnside, Craig. 2011. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment." American Economic Review, 101(7): 3456-76.

DOI: 10.1257/aer.101.7.3456

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 the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. (JEL: C58, E21, F31, G11, G12)

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Authors

Burnside, Craig (Duke U and U Glasgow)

JEL Classifications

C58: Financial Econometrics
E21: Macroeconomics: Consumption; Saving; Wealth
F31: Foreign Exchange
G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates


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