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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Systematic consumption risk in currency returns |
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| Authors |
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| Language |
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| 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. |
| Official URL | http://www.econ.uzh.ch/static/wp/econwp124.pdf |
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| Keywords | Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model, Portfoliomanagement, Verbrauch, Wechselkurs, Zinsparität, Kapitalmarkttheorie |