Origins of International Factor Structures

Abstract

We develop and test a model of the global trade network. This model connects international comovements of quantities and asset prices to a simple measure of network closeness, constructed from observed trade weights. We report three findings: (1) Countries that are closer in the network tend to have more correlated consumption growth rates, more correlated stock returns, and more correlated exchange rate movements. (2) International comovements can be decomposed into a component driven by primitive productivity shocks and a component due to network transmissions. Asset price correlations tend to be explained by the network structure, while consumption correlations by the correlations of primitive shocks. (3) The trade network generates factor structures in equity returns and exchange rate movements. It helps to explain the existence of the dollar and the carry factors, and gives rise to regional factors. These findings offer a network-based account of the origins of factor structures in international economic quantities and asset prices.

Keywords: International Comovements, Exchange Rates, Trade Networks

JEL Classification: F10, F31, F44, G15