Currency Risk Factors in a Recursive Multi-Country Economy

77 Pages Posted: 24 Dec 2014 Last revised: 5 Dec 2017

Ric Colacito

University of North Carolina Kenan-Flagler Business School

Mariano (Max) Massimiliano Croce

University of North Carolina Kenan-Flagler Business School; Centre for Economic Policy Research (CEPR)

Federico Gavazzoni

INSEAD

Robert C. Ready

University of Oregon - Department of Finance

Date Written: May 14, 2017

Abstract

Focusing on the ten countries with the most-traded currencies, we provide novel empirical evidence about the existence of significant heterogenous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply is subject to both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to global long-run growth shocks results in both a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013).

Keywords: Recursive Risk Sharing, Carry Trade, Currency Risk Factors

JEL Classification: C62, F31, G12

Suggested Citation

Colacito, Ric and Croce, Mariano (Max) Massimiliano and Gavazzoni, Federico and Ready, Robert C., Currency Risk Factors in a Recursive Multi-Country Economy (May 14, 2017). INSEAD Working Paper No. 2015/40/FIN; Journal of Finance, Forthcoming; Simon Business School Working Paper No. FR 15-10; INSEAD Working Paper No. 2015/40/FIN. Available at SSRN: https://ssrn.com/abstract=2542182 or http://dx.doi.org/10.2139/ssrn.2542182

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

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

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Federico Gavazzoni

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://federicogavazzoni.com

Robert C. Ready (Contact Author)

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
567
rank
42,100
Abstract Views
2,007
PlumX