Countercyclical Currency Risk Premia
78 Pages Posted: 4 Oct 2010 Last revised: 22 May 2022
There are 2 versions of this paper
Countercyclical Currency Risk Premia
Date Written: September 2010
Abstract
We describe a novel currency investment strategy, the 'dollar carry trade,' which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for taking on aggregate risk by shorting the dollar in bad times, when the U.S. price of risk is high. The counter-cyclical variation in risk premia leads to strong return predictability: the average forward discount and U.S. industrial production growth rates forecast up to 25% of the dollar return variation at the one-year horizon. The estimated model implies that the variation in the exposure of U.S. investors to world-wide risk is the key driver of predictability.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Cross-Section of Currency Risk Premia and Us Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
Carry Trades and Currency Crashes
By Markus K. Brunnermeier, Stefan Nagel, ...