Premium
Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns
Author(s) -
ZVIADADZE IRINA
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12501
Subject(s) - economics , inflation (cosmology) , interest rate , monetary economics , consumption (sociology) , yield curve , shock (circulatory) , risk premium , currency , real interest rate , econometrics , investment (military) , foreign exchange risk , international fisher effect , variance (accounting) , nominal interest rate , medicine , social science , physics , sociology , politics , theoretical physics , political science , law , accounting
I relate the downward‐sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a prominent role. Higher yield currencies exhibit higher multiperiod exposures to these shocks. The prices of these risk exposures are positive and sizeable across all investment horizons. The interest rate shock is qualitatively similar to the long‐run risk of Bansal and Yaron.