Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/77705
Authors: 
Hoffmann, Mathias
Suter, Rahel
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4273
Abstract: 
We sort currencies by countries' consumption growth over the past four quarters. Currency portfolios of countries experiencing consumption booms have higher Sharpe ratios than those of countries going through a consumption-based recession. A carry strategy that goes short in countries that are in a consumption bust and goes long in countries with a consumption boom yields consistently positive excess returns. This excess return compensates for the risk of high negative returns in worldwide downturns. Our consumption carry factor prices the cross section of portfolios of currencies sorted on various characteristics (consumption, interest rates) and also does well on the cross section of bilateral currency movements. Eventually, a habit formation model allows to interpret these results: sorting currencies on past consumption growth is akin to sorting countries on risk aversion, and low (high) risk aversion currencies depreciate (appreciate) in times of global turmoil.
Subjects: 
foreign exchange
carry trade returns
consumption risk
asset pricing
JEL: 
E44
F31
F44
G12
G15
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.