41 Pages Posted: 5 Feb 2010 Last revised: 3 Oct 2012
Date Written: June 30, 2011
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: 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