Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies

50 Pages Posted: 27 Oct 2016

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

John Crosby

University of Maryland - Robert H. Smith School of Business

Date Written: October 25, 2016

Abstract

We develop an incomplete markets framework to synthesize domestic and foreign stochastic discount factors (SDFs) that are consistent with limited international risk sharing. The fundamental departure in our paper is that exchange rate growth need not equal the ratio of SDFs, and we develop a restriction that precludes “good deals” in international economies with incomplete markets. Our innovation is to study an incomplete markets problem that is consistent with SDFs that (i) are nonnegative, (ii) correctly price returns, and (iii) disallow “good deals.”

Keywords: Incomplete Markets, Limited Risk Sharing, Currency Puzzles

Suggested Citation

Bakshi, Gurdip S. and Cerrato, Mario and Crosby, John, Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies (October 25, 2016). Robert H. Smith School Research Paper No. RHS 2858834. Available at SSRN: https://ssrn.com/abstract=2858834 or http://dx.doi.org/10.2139/ssrn.2858834

Gurdip S. Bakshi (Contact Author)

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

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