Currency Risk Factors in a Recursive Multicountry Economy
79 Pages Posted: 22 Jan 2018
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
Federico Gavazzoni
INSEAD ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
France
HOME PAGE: http://federicogavazzoni.com
Do you have a job opening that you would like to promote on SSRN?
Currency Risk Factors in a Recursive Multicountry Economy
This is a CEPR Discussion Paper. CEPR charges a fee of $8.00 for this paper.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.
