Working Paper: NBER ID: w13129
Authors: Craig Burnside
Abstract: Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross-sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle.
Keywords: No keywords provided
JEL Codes: F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SDF proposed by LV (C69) | Excess returns (G19) |
| Consumption risk (D11) | Expected returns of currency portfolios (F31) |
| Covariance between returns and SDF (C10) | Expected returns of currency portfolios (F31) |
| Additional test assets (Y10) | Model performance (C52) |
| Consumption growth (E20) | Currency returns (F31) |