Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns

I relate the downward-sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a promi...

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Bibliographic Details
Published in:The Journal of finance (New York) 2017-08, Vol.72 (4), p.1529-1566
Main Author: ZVIADADZE, IRINA
Format: Article
Language:English
Subjects:
Compensation
Consumption
Currency
Economic models
Hedging
Inflation
Interest rates
Money
Prices
Risk exposure
Risk premiums
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Summary:I relate the downward-sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a prominent role. Higher yield currencies exhibit higher multiperiod exposures to these shocks. The prices of these risk exposures are positive and sizeable across all investment horizons. The interest rate shock is qualitatively similar to the long-run risk of Bansal and Yaron.
ISSN:0022-1082
1540-6261
1540-6261
DOI:10.1111/jofi.12501