Template-Type: ReDIF-Paper 1.0

Author-Name: Hanno Lustig
Author-X-Name-First: Hanno 
Author-X-Name-Last: Lustig
Author-Email:
Author-Workplace-Name: UCLA/NBER
Author-Name: Adrien Verdelhan
Author-X-Name-First: Adrien 
Author-X-Name-Last:Verdelhan 
Author-Email: av@bu.edu
Author-Workplace-Name:  Department of Economics, Boston University

Title: The Cross-Section of Foreign Currency
Risk Premia and Consumption Growth
Risk

Abstract: Aggregate consumption growth risk explains why low interest rate curren-
cies do not appreciate as much as the interest rate diŽerential and why high
interest rate currencies do not depreciate as much as the interest rate diŽer-
ential. Domestic investors earn negative excess returns on low interest rate
currency portfolios and positive excess returns on high interest rate currency
portfolios. Because high interest rate currencies depreciate on average when
domestic consumption growth is low and low interest rate currencies appreci-
ate under the same conditions, low interest rate currencies provide domestic
investors with a hedge against domestic aggregate consumption growth risk.

Length:  pages
Creation-Date: 2006-02
Revision-Date: 
Publication-Status:
File-URL: http://people.bu.edu/av/FX_Xsection.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2006-045
Classification-JEL: F31,G12.
Keywords: 
Handle: RePEc:bos:wpaper:WP2006-045