Exchange Rates and Asset Prices in a Global Demand System

53 Pages Posted: 18 Jun 2019 Last revised: 2 Jun 2020

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

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2020

Abstract

Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices; interpreting major economic events such as the European sovereign debt crisis; and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 percent on US equity.

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 1, 2020). 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 )

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Chicago, IL 60637
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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 )

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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

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Cambridge, MA 02138
United States

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