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

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

By
Hanno Lustig, Adrien Verdelhan
American Economic Review. December
2011, Vol. 101, Issue 7, Pages 3477-3500

The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption risk price differs significantly from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. Additionally, this investment strategy’s consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness.