Asset Prices and Real Exchange Rates with Deep Habits

Review of Financial Studies, Forthcoming

59 Pages Posted: 9 Oct 2009 Last revised: 13 Jun 2014

See all articles by Christian Heyerdahl-Larsen

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: June 12, 2014

Abstract

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.

Keywords: Asset Pricing Moments, Real Exchange Rates, Multi-Good Economies, Deep Habits

JEL Classification: F31, G10

Suggested Citation

Heyerdahl-Larsen, Christian, Asset Prices and Real Exchange Rates with Deep Habits (June 12, 2014). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1484584 or http://dx.doi.org/10.2139/ssrn.1484584

Christian Heyerdahl-Larsen (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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