Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/77558 
Year of Publication: 
2013
Series/Report no.: 
Working Paper No. 124
Publisher: 
University of Zurich, Department of Economics, Zurich
Abstract: 
We sort currencies into portfolios by countries' consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return - our consumption carry factor - prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.
Subjects: 
foreign exchange
uncovered interest parity
carry trade returns
consumption risk
asset pricing
habit model
JEL: 
E44
F31
F44
G12
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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