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Systematic consumption risk in currency returns


Hoffmann, Mathias; Suter, Rahel (2013). Systematic consumption risk in currency returns. Working paper series / Department of Economics 124, University of Zurich.

Abstract

We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.

Abstract

We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:E44, F31, F44, G12, G15
Uncontrolled Keywords:Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model
Language:English
Date:June 2013
Deposited On:19 Jun 2013 09:52
Last Modified:07 Dec 2017 21:25
Series Name:Working paper series / Department of Economics
Number of Pages:35
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp124.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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