ARTICLE
Incomplete Consumption Risk Sharing and Currency Risk Premiums

Author: Sarkissian S.^{1, 2}

Source: Review of Financial Studies, Volume 16, Number 3, 2003 , pp. 983-1005(23)

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Abstract:

This article studies the impact of imperfect consumption risk sharing across countries on the formation of time-varying risk premiums in the foreign exchange market and on their cross-sectional differences. These issues are addressed within the framework of the Constantinides and Duffie (1996) model applied to a multicountry world. The article shows that the cross-country variance of consumption growth rates is counter-cyclical and that this feature of consumption data is mildly helpful for currency pricing. In particular, unlike the standard CCAPM, the new model is able to generate currency risk premiums at lower values of risk aversion and provide certain explanatory power for cross-sectional differences in currency returns.

Document Type: Original article

Affiliations: 1: McGill University 2: Address correspondence to Sergei Sarkissian, Faculty of Management, 1001 Sherbrooke St. W, Montreal H3A1G5, Canada, or e-mail: sergei.sarkissian@mcgill.ca.

Publication date: 2003-01-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.