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

Author:

Burnside Craig1

Affiliation:

1. Duke University, Department of Economics, Durham, NC 27708, University of Glasgow, and National Bureau of Economic Research.

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,” yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. JEL: C58, E21, F31, G11, G12

Publisher

American Economic Association

Subject

Economics and Econometrics

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