The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Comment
- 1 May 2007
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yetthese excess returns are all approximately uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the returns. Their positive assessment results from allowing for a large constant in the model, and from ignoring sampling uncertainty in estimated betas used as explanatory variables in cross-sectional regressions that determine estimated consumption risk premiaKeywords
This publication has 6 references indexed in Scilit:
- The Cross Section of Foreign Currency Risk Premia and Consumption Growth RiskAmerican Economic Review, 2007
- A Consumption‐Based Explanation of Expected Stock ReturnsThe Journal of Finance, 2006
- Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening OrderPublished by National Bureau of Economic Research ,2000
- An Asymptotic Theory for Estimating Beta‐Pricing Models Using Cross‐Sectional RegressionThe Journal of Finance, 1998
- On the Estimation of Beta-Pricing ModelsThe Review of Financial Studies, 1992
- Large Sample Properties of Generalized Method of Moments EstimatorsEconometrica, 1982