TY  - JOUR
AU  - Lustig,Hanno
AU  - Verdelhan,Adrien
TI  - The Cross-Section of Currency Risk Premia and US Consumption Growth Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11104
PY  - 2005
Y2  - February 2005
UR  - http://www.nber.org/papers/w11104
L1  - http://www.nber.org/papers/w11104.pdf
N1  - Author contact info:
Hanno Lustig
UCLA Anderson School of Management
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-1011
Fax: 310/825-9528
E-Mail: hlustig@anderson.ucla.edu

Adrien Verdelhan
MIT Sloan School of Management
100 Main Street, E62-621
Cambridge, MA 02142
Tel: 617/253-5123
E-Mail: adrienv@mit.edu
AB  - Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. We sort foreign T-bills into portfolios based on the nominal interest rate differential with the US, and we test the Euler equation of a US investor who invests in these currency portfolios. US investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rates currency portfolios. We find that low interest rate currencies provide US investors with a hedge against US aggregate consumption growth risk, because these currencies appreciate on average when US consumption growth is low, while high interest rate currencies depreciate when US consumption growth is low. As a result, the risk premia predicted by the Consumption-CAPM match the average excess returns on these currency portfolios.
ER  -