Asset Prices and Real Exchange Rates with Deep Habits
London Business School - Department of Finance
June 12, 2014
Review of Financial Studies, Forthcoming
I introduce an external habit for each consumption good, known as deep habits, into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries. I show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments. Calibrated to a set of ten countries, the model reproduces the cross-sectional evidence on currency risk premiums when sorting on interest rates, interest rate volatility, innovations to global exchange rate volatility, and value. Hence, the model provides an equilibrium interpretation of these empirical regularities.
Number of Pages in PDF File: 59
Keywords: Asset Pricing Moments, Real Exchange Rates, Multi-Good Economies, Deep Habits
JEL Classification: F31, G10Accepted Paper Series
Date posted: October 9, 2009 ; Last revised: June 13, 2014
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