Université de Lausanne
Ecole des HEC
Département d'économétrie et d'économie politique

Thursday December 4, 2008, 13:00
Extranef, room 126

Robert DE SANTIS
(European Central Bank, Frankfurt am Main, Germany)

Does Business Cycle Risk Account for Systematic Returns from Currency Positioning?
The International Perspective

Abstract
Low-yielding currencies (relative to dollar interest rate and based on annual data) represent a strong hedging tool for a US investor in the event of a slowdown of the US economy, as shown in Lustig and Verdelhan (2007). In this paper we show that such a conclusion is far more general, holding jointly for representative agents in a number of countries (Australia, Canada, France, United Kingdom and United States) and for quarterly holding period returns, which are closer to the frequency at which portfolios are re-balanced. The prices of risk for nondurable and durable consumption growth explain the cross-sectional variation of average currency portfolio returns, as con.rmed by high R² coefficients. However, statistical signi.cance of the coefficients, checked both individually and joint, does not exceed 10%. Overall, taking an economic standpoint, holding currencies that pay out low interest rates provides some means of insurance against economic slowdown in the domestic economy.

Web site of the seminar (with paper online): http://www.hec.unil.ch/deep/evenements-english/e-sem-all-2008-09.htm