Systematic consumption risk in currency returns

Mathias Hoffman, Rahel Studer-Suter

    Research output: Contribution to journalArticle

    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.
    Original languageEnglish
    Pages (from-to)187-208
    JournalJournal of International Money and Finance
    Volume74
    DOIs
    Publication statusPublished - 2017

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