Systematic Consumption Risk in Currency Returns

Imports, Exports, Currency Risk Exposure, and Stock Returns

Economic theory suggests that the magnitude and direction of a company’s currency risk exposure depends crucially on its fundamental involvement in international trade. For US industries, we find that the stock performance of an import-oriented company moves positively with the performance of the dollar, but the stock performance of an export-oriented company tends to move against the dollar. B...

Cash Flow, Consumption Risk and Cross Section of Stock Returns

This paper directly links the risk premium on an asset to two characteristics of its underlying cash flow: cash flow covariance with aggregate consumption; and cash flow duration, which measures the temporal pattern of the cash flow. Their impact on the cross-sectional variation of risk premia can be largely captured by a two-factor cash flow model. While cash flow covariance is of firstorder i...

Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns

This paper investigates the importance of idiosyncratic consumption risk for the cross-sectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We o®er evidence that the cross-sectional variance of consumption growth is also a priced factor. This demo...

The price – consumption puzzle of currency pegs

A defining stylized fact associated with exchange-rate-based stabilization programs is that their initial phase is characterized by several years of continuous expansion in private consumption and a gradual appreciation of the real exchange rate. This paper shows that a large class of standard optimizing models is unable to account for this empirical regularity. In particular, models in this cl...

Systematic risk and the cross-section of hedge fund returns