Exchange Rates and Asset Prices in a Global Demand System

47 Pages Posted: 18 Jun 2019 Last revised: 16 Jul 2019

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: June 21, 2019

Abstract

Using cross-country holdings, we estimate a demand system for financial assets across 36 countries. Based on the estimated demand system and market clearing, we decompose exchange rates, long-term yields, and equity prices into three sources of variation: macro variables, policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves), and latent demand. The former two account for 58 percent of the variation in exchange rates, and the remaining variation due to latent demand is geographically concentrated. Policy variables account for 66 percent of the variation in long-term yields. Macro variables account for 63 percent of the variation in equity prices.

Keywords: Asset demand system, Asset pricing, Foreign exchange reserves, Monetary policy, Portfolio choice

JEL Classification: E52, F31, G12

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, Exchange Rates and Asset Prices in a Global Demand System (June 21, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-91. Available at SSRN: https://ssrn.com/abstract=3383677 or http://dx.doi.org/10.2139/ssrn.3383677

Ralph S. J. Koijen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Motohiro Yogo (Contact Author)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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