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Consumption growth, uncovered equity parity and the cross-section of returns on foreign currencies

Author

Listed:
  • Thomas Nitschka
Abstract
Lagged foreign stock returns in excess of the U.S. stock market return are informative about quarterly exchange rate movements. A past high foreign stock return relative to the U.S. signals a foreign currency depreciation and hence low returns on the foreign currency. Conditional on stock return differentials, the consumption-based CAPM (CCAPM) explains the cross-sectional dispersion in U.S. dollar exchange rates. The CCAPM captures more than 40 percent of the variation in foreign currency returns scaled with the respective stock return differential on a country-by-country basis.

Suggested Citation

  • Thomas Nitschka, 2007. "Consumption growth, uncovered equity parity and the cross-section of returns on foreign currencies," IEW - Working Papers 340, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:340
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    File URL: https://www.zora.uzh.ch/id/eprint/52294/1/iewwp340.pdf
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    References listed on IDEAS

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    Cited by:

    1. Olga Klinkowska & Angelica Gonzalez & Abhay Abhyankar, 2012. "Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information," 2012 Meeting Papers 56, Society for Economic Dynamics.

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    More about this item

    Keywords

    Consumption-based CAPM; foreign currency return; uncovered equity parity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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