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The cross-section of currency risk premia and US consumption growth risk

Author: Hanno Lustig; Adrien Verdelhan; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2005.
Series: Working paper series (National Bureau of Economic Research), working paper no. 11104.
Edition/Format:   Print book : EnglishView all editions and formats
Database:WorldCat
Summary:
"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. We sort foreign T-bills into portfolios based on the nominal interest rate differential with the US, and we test the Euler equation of a US investor who invests in these currency  Read more...
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Material Type: Internet resource
Document Type: Book, Internet Resource
All Authors / Contributors: Hanno Lustig; Adrien Verdelhan; National Bureau of Economic Research.
OCLC Number: 57732914
Notes: "February 2005."
Description: 45 pages : illustrations ; 22 cm.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 11104.
Responsibility: by 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. We sort foreign T-bills into portfolios based on the nominal interest rate differential with the US, and we test the Euler equation of a US investor who invests in these currency portfolios. US investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rates currency portfolios. We find that low interest rate currencies provide US investors with a hedge against US aggregate consumption growth risk, because these currencies appreciate on average when US consumption growth is low, while high interest rate currencies depreciate when US consumption growth is low. As a result, the risk premia predicted by the Consumption-CAPM match the average excess returns on these currency portfolios"--National Bureau of Economic Research web site.

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