Currency Risk Factors in a Recursive Multicountry Economy

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)

Federico Gavazzoni

INSEAD

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

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

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.unc.edu/~colacitr

Mariano Massimiliano Croce

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Federico Gavazzoni

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://federicogavazzoni.com

Robert Ready

University of Rochester ( email )

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