Asset Prices and Exchange Rates

Posted: 25 Jun 2008

See all articles by Anna Pavlova

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 4 versions of this paper

Date Written: 2007

Abstract

We study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model. Trade in goods gives rise to an additional channel of international propagation—through the terms of trade—absent in traditional single-good models. The inclusion of demand shocks helps overturn many unrealistic implications of existing international finance models in which productivity shocks are the sole source of uncertainty. Our model generates a rich set of implications on how stock, bond, and foreign exchange markets co-move. We solve the model in closed-form, which yields a system of equations that can be readily estimated empirically. Our estimation validates the main predictions of the theory.

Keywords: G12, G15, F31, F36

Suggested Citation

Pavlova, Anna and Rigobon, Roberto, Asset Prices and Exchange Rates (2007). The Review of Financial Studies, Vol. 20, Issue 4, pp. 1139-1180, 2007, Available at SSRN: https://ssrn.com/abstract=1151158 or http://dx.doi.org/10.1093/rfs/hhm008

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
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+44 20 7000 8218 (Phone)

HOME PAGE: http://https://www.anna-pavlova.co.uk/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

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