Exchange Rates and Asset Prices in a Global Demand System
47 Pages Posted: 18 Jun 2019 Last revised: 16 Jul 2019
Date Written: June 21, 2019
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: Suggested Citation