Consumption Growth, Uncovered Equity Parity And The Cross-section Of Returns On Foreign Currencies

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 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.