scholarly journals The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment

2011 ◽  
Vol 101 (7) ◽  
pp. 3456-3476 ◽  
Author(s):  
Craig Burnside
Keyword(s):  
Foreign Currency ◽  
Risk Premia ◽  
Expected Returns ◽  
Stochastic Discount Factor ◽  
Forward Premium Puzzle ◽  
Cross Sectional ◽  
Consumption Growth ◽  
Forward Premium ◽  
The Cross ◽  
Premium Puzzle

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. JEL: C58, E21, F31, G11, G12

scholarly journals A NOTE ON THE FORWARD AND THE EQUITY PREMIUM PUZZLES: TWO SYMPTOMS OF THE SAME ILLNESS?

2013 ◽  
Vol 19 (2) ◽  
pp. 446-464 ◽  
Author(s):  
Carlos E. da Costa ◽  
João V. Issler ◽  
Paulo F. Matos
Keyword(s):  
Euler Equations ◽  
Equity Premium ◽  
Financial Data ◽  
Stochastic Discount Factor ◽  
Foreign Markets ◽  
Forward Premium Puzzle ◽  
Forward Premium ◽  
Premium Puzzle ◽  
The Moment ◽  
Moment Restrictions

We build a stochastic discount factor—SDF—using U.S. domestic financial data only, and provide evidence that it accounts for stylized facts about foreign markets that escape SDFs generated by consumption-based models. When our SDF is interpreted as the projection of the pricing kernel from a fully specified model in the space of returns, our results indicate that a model that accounts for the behavior of domestic assets goes a long way toward accounting for the behavior of foreign asset prices. In our tests, we address predictability, a defining feature of the forward premium puzzle—FPP—by using instruments that are known to forecast excess returns in the moment restrictions associated with Euler equations both in the equity and in the foreign markets.

The Cross Section of Expected Returns with MIDAS Betas

2011 ◽  
Vol 47 (1) ◽  
pp. 115-135 ◽  
Author(s):  
Mariano González ◽  
Juan Nave ◽  
Gonzalo Rubio
Keyword(s):  
Cross Section ◽  
Risk Premium ◽  
Market Risk ◽  
Ordinary Least Squares ◽  
Mixed Data ◽  
Expected Returns ◽  
Data Sampling ◽  
Cross Sectional ◽  
Market Risk Premium ◽  
The Cross

AbstractThis paper explores the cross-sectional variation of expected returns for a large cross section of industry and size/book-to-market portfolios. We employ mixed data sampling (MIDAS) to estimate a portfolio’s conditional beta with the market and with alternative risk factors and innovations to well-known macroeconomic variables. The market risk premium is positive and significant, and the result is robust to alternative asset pricing specifications and model misspecification. However, the traditional 2-pass ordinary least squares (OLS) cross-sectional regressions produce an estimate of the market risk premium that is negative, and significantly different from 0. Using alternative procedures, we compare both beta estimators. We conclude that beta estimates under MIDAS present lower mean absolute forecasting errors and generate better out-of-sample performance of the optimized portfolios relative to OLS betas.

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