International Asset Pricing with Recursive Preferences

53 Pages Posted: 14 Mar 2012 Last revised: 10 Mar 2017

Ric Colacito

University of North Carolina Kenan-Flagler Business School

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2013

Abstract

Focusing on US and UK, we document that both the Backus and Smith (1993) finding -- concerning the low correlation between consumption differentials and exchange rates -- and the forward-premium anomaly -- concerning the tendency of high interest rate currencies to appreciate -- have become more severe through time. After accounting for different capital mobility regimes, we show that these anomalies turn into general equilibrium regularities in a two-country and two-good economy with Epstein and Zin (1989) preferences, frictionless markets, and correlated long-run growth prospects.

Keywords: Recursive preferences, risk-sharing, exchange rate

JEL Classification: C62, F31, G12

Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano, International Asset Pricing with Recursive Preferences (January 18, 2013). Journal of Finance, 2013; AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2021328 or http://dx.doi.org/10.2139/ssrn.2021328

Riccardo Colacito

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 (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://https://sites.google.com/view/mmcroce/home

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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

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

HOME PAGE: http://https://sites.google.com/view/mmcroce/home

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