Abstract

https://ssrn.com/abstract=2701189
 
 

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Risk Appetite and Exchange Rates


Tobias Adrian


International Monetary Fund

Erkko Etula


Independent; New York University (NYU) - Leonard N. Stern School of Business

Hyun Song Shin


Bank for International Settlements; Princeton University - Department of Economics

2015-12-01

FRB of NY Staff Report No. 750

Abstract:     
We present evidence that the growth of U.S.-dollar-denominated banking sector liabilities forecasts appreciations of the U.S. dollar, both in-sample and out-of-sample, against a large set of foreign currencies. We provide a theoretical foundation for a funding liquidity channel in a global banking model where exchange rates fluctuate as a function of banks' balance sheet capacity. We estimate prices of risk using a cross-sectional asset pricing approach and show that the U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. Our empirical evidence shows that this channel is separate from the more familiar 'carry trade' channel. Although the financial crisis of 2007-09 induced a structural shift in our forecasting variables, when we control for this shift, the forecasting relationship is preserved.

Number of Pages in PDF File: 37

Keywords: asset pricing, financial intermediaries, exchange rates

JEL Classification: F30, F31, G12, G24


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Date posted: December 10, 2015  

Suggested Citation

Adrian, Tobias and Etula, Erkko and Shin, Hyun Song, Risk Appetite and Exchange Rates (2015-12-01). FRB of NY Staff Report No. 750. Available at SSRN: https://ssrn.com/abstract=2701189

Contact Information

Tobias Adrian (Contact Author)
International Monetary Fund ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
HOME PAGE: http://www.tobiasadrian.com
Erkko Etula
Independent ( email )
No Address Available
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States

Hyun Song Shin
Bank for International Settlements ( email )
Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland
HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

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