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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Systematic consumption risk in currency returns
Organization Unit
  • Mathias Hoffmann
  • Rahel Suter
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 124
ISSN 1664-7041
Number of Pages 35
Date 2013
Abstract Text 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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Keywords Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model, Portfoliomanagement, Verbrauch, Wechselkurs, Zinsparität, Kapitalmarkttheorie