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International Asset Pricing with Risk-Sensitive AgentsRiccardo ColacitoUniversity of North Carolina, Chapel Hill - Kenan-Flagler Business School Mariano Massimiliano CroceUniversity of North Carolina Kenan-Flagler Business School June 30, 2011 Abstract: We propose a frictionless general equilibriummodel in which two international consumers with recursive preferences trade two consumption goods and a complete set of date- and state-contingent securities. Consumption home bias and concern for the temporal distribution of risk generate rich dynamics for international prices and quantities. In our model, exchange rate movements are as volatile as they are in the data. Furthermore, both the volatility of the exchange rate movements and risk premia are endogenously time varying and history dependent.
Number of Pages in PDF File: 41 Keywords: Recursive Preferences, time-varying volatility, international finance, exchange rates JEL Classification: C62, F31, G12 working papers seriesDate posted: February 5, 2010 ; Last revised: October 3, 2012Suggested CitationContact Information
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