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
Date Written: June 12, 2014
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: Suggested Citation