Implications of Incomplete Markets for International Economies

Review of Financial Studies (Forthcoming)

71 Pages Posted: 21 Sep 2017

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business

Mario Cerrato

Glasgow University

John Crosby

University of Maryland - Robert H. Smith School of Business

Date Written: September 8, 2017

Abstract

We develop a restriction that precludes implausibly high reward-for-risk in incomplete international economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors (SDFs) subject to correct pricing. The problem is analytically solvable and synthesizes domestic and foreign SDFs into spanned and unspanned components. Our novelty is that exchange rate growth need not equal the ratio of SDFs and that the SDF correlations are plausibly lowered. Exploiting realities of cross-country correlations of macroeconomic quantities, namely, consumption, wealth, dividend growths, and asset returns, our empirical investigation refutes the specification of complete markets.

Keywords: Incomplete Markets, Exchange Rates

JEL Classification: F31, G12, G15

Suggested Citation

Bakshi, Gurdip S. and Cerrato, Mario and Crosby, John, Implications of Incomplete Markets for International Economies (September 8, 2017). Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3039645

Gurdip S. Bakshi

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

Glasgow University ( email )

Glasgow
United Kingdom

John Crosby (Contact Author)

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/

Register to save articles to
your library

Register

Paper statistics

Downloads
64
Abstract Views
270
rank
348,241
PlumX Metrics