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  4. December 2011
  5. The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply

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

  • Hanno Lustig
  • Adrien Verdelhan
American Economic Review
vol. 101, no. 7, December 2011
(pp. 3477-3500)
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Abstract

The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption risk price differs significantly from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. Additionally, this investment strategy's consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. (JEL: C58, E21, F31, G11, G12)

Citation

Lustig, Hanno, and Adrien Verdelhan. 2011. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply." American Economic Review, 101 (7): 3477-3500. DOI: 10.1257/aer.101.7.3477

Additional Materials

JEL Classification

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