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Systematic consumption risk in currency returns


Hoffmann, Mathias; Studer-Suter, Rahel (2017). Systematic consumption risk in currency returns. Journal of International Money and Finance, 74:187-208.

Abstract

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.

Abstract

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.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model
Language:English
Date:June 2017
Deposited On:17 Jan 2018 16:06
Last Modified:20 Sep 2018 04:27
Publisher:Elsevier
ISSN:0261-5606
Additional Information:Also published as Department of Economics, Working Paper No. 124 (see https://doi.org/10.5167/uzh-78632).
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jimonfin.2017.01.001

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