Currency Risk Factors in a Recursive Multicountry Economy

Colacito, Ric; Croce, Mariano (Max) Massimiliano; Gavazzoni, Federico; Ready, Robert

Currency Risk Factors in a Recursive Multicountry Economy

CEPR Discussion Paper No. DP12610

79 Pages Posted: 22 Jan 2018

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Robert Ready

University of Rochester

Date Written: January 2018

Abstract

Focusing on the ten most traded currencies, we provide empirical evidence regarding a significant heterogeneous 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 features both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to long-lasting global growth shocks results in 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).

JEL Classification: C62, F31, G12

Suggested Citation: Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano and Gavazzoni, Federico and Ready, Robert, Currency Risk Factors in a Recursive Multicountry Economy (January 2018). CEPR Discussion Paper No. DP12610. Available at SSRN: https://ssrn.com/abstract=3106814