Origins of International Factor Structures

61 Pages Posted: 26 Jun 2019 Last revised: 21 Sep 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance

Date Written: June 28, 2019

Abstract

We show that exchange rate and international consumption comovements can be decomposed into components driven by trade network linkages, supply shocks, and demand shocks. Exchange rate correlations tend to be explained by trade network linkages, while consumption correlations tend to be explained by supply shock correlations. We explain this disconnect using an international network model where demand shocks are driven by market segmentation. We then show that the trade network generates common factors that align with the common factors in exchange rates. Our findings offer a trade-based account for the origins of comovements and factor structures in international asset prices and shed light on the nature of frictions in international financial markets.

Keywords: International Comovements, Exchange Rates, Trade Networks

JEL Classification: F10, F31, F44, G15

Suggested Citation

Jiang, Zhengyang and Richmond, Robert, Origins of International Factor Structures (June 28, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3404207 or http://dx.doi.org/10.2139/ssrn.3404207

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Richmond (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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