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Financial Amplification of Foreign Exchange Risk PremiaTobias AdrianFederal Reserve Bank of New York Erkko Etulaaffiliation not provided to SSRN Jan J. J. GroenFederal Reserve Bank of New York July 1, 2010 FRB of New York Staff Report No. 461 Abstract: Theories of systemic risk suggest that financial intermediaries’ balance-sheet constraints amplify fundamental shocks. We provide supporting evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediaries’ balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring.
Number of Pages in PDF File: 33 Keywords: foreign exchange risk premium, systemic risk monitoring, financial intermediation, asset pricing JEL Classification: G15, G01, G17, F31 working papers seriesDate posted: August 1, 2010Suggested CitationContact Information
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