The Geography of Exchange Rate Disconnect

Abstract

This paper proposes a measure of exchange rate disconnect. Working in a two-currency inter-
national economy, our theory implies that the disconnect is the ratio of two martingales. We analyze empirically our measure of disconnect using 406 pairs of economies to reveal a geography of disconnect. Linking theory to returns of international bonds and equities, we examine cross-sectional disparities in disconnect with respect to multidimensional attributes of the global
economy.

Keywords: Exchange rate disconnect, geography, international bond, equity, and currency markets

JEL Classification: G12, G15, E44, F31, F36