Model-Free International Stochastic Discount Factors

43 Pages Posted: 16 Nov 2017 Last revised: 21 Nov 2018

See all articles by Mirela Sandulescu

Mirela Sandulescu

University of Lugano; Swiss Finance Institute

Fabio Trojani

Swiss Finance Institute; University of Geneva

Andrea Vedolin

Boston University - Department of Finance & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2018

Abstract

We characterize model-free international stochastic discount factors (SDFs) and unspanned FX risks under different degrees of market segmentation. While estimated SDFs perfectly match international macro-finance puzzles, properties of SDFs and unspanned FX risks vary starkly across market structures: In integrated markets SDFs are highly volatile and both SDFs and unspanned risks are almost perfectly comoving, but segmented markets feature less correlated uninsurable risks and less volatile and correlated SDFs. We interpret this evidence through the lens of an economy where constrained intermediaries supply insurance-like contracts that hedge unspanned FX risks to households.

Keywords: stochastic discount factor, exchange rates, market segmentation, financial intermediaries

JEL Classification: F31, G12

Suggested Citation

Sandulescu, Mirela and Trojani, Fabio and Vedolin, Andrea, Model-Free International Stochastic Discount Factors (April 20, 2018). Swiss Finance Institute Research Paper No. 18-18; Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3070739 or http://dx.doi.org/10.2139/ssrn.3070739

Mirela Sandulescu

University of Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

Andrea Vedolin (Contact Author)

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
402
rank
70,691
Abstract Views
2,012
PlumX Metrics