International Asset Pricing with Risk-Sensitive Agents

41 Pages Posted: 5 Feb 2010 Last revised: 3 Oct 2012

Riccardo Colacito

University of North Carolina Kenan-Flagler Business School

Mariano Massimiliano Croce

University of North Carolina Kenan-Flagler Business School

Date Written: 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.

Keywords: Recursive Preferences, time-varying volatility, international finance, exchange rates

JEL Classification: C62, F31, G12

Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano, International Asset Pricing with Risk-Sensitive Agents (June 30, 2011). Available at SSRN: https://ssrn.com/abstract=1547248 or http://dx.doi.org/10.2139/ssrn.1547248

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.unc.edu/~colacitr

Mariano Massimiliano Croce

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://dl.dropboxusercontent.com/u/17690403/mmc_site/public_html/index.htm

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