International Trade and the Risk in Bilateral Exchange Rates

69 Pages Posted: 29 Jan 2021 Last revised: 1 Mar 2022

See all articles by Ramin Hassan

Ramin Hassan

University of Minnesota, Finance

Erik Loualiche

University of Minnesota, Finance

Alexandre Reggi Pecora

University of Minnesota - Twin Cities - Department of Business Finance

Colin Ward

University of Minnesota - Carlson School of Management

Date Written: February 28, 2022

Abstract

Exchange rate volatility falls after a trade deal, driven by a decline in the systematic component of risk. The average trade deal increases trade by 50 percent over five years, reducing systematic risk by a third of a standard deviation across countries. We examine this connection in an Armington model where the structure of trade networks determines the risk in exchange rates. We estimate our model to current data and find i) that countries at the periphery of the world trade network benefit the most from lower trade barriers and ii) that a counterfactual experiment of a trade war between the US and China shows a global increase in currency risk, with effects concentrated among peripheral countries.

Keywords: exchange rates, factor models, networks, trade agreements

JEL Classification: F11, F31, G15

Suggested Citation

Hassan, Ramin and Loualiche, Erik and Reggi Pecora, Alexandre and Ward, Colin, International Trade and the Risk in Bilateral Exchange Rates (February 28, 2022). Available at SSRN: https://ssrn.com/abstract=3745935 or http://dx.doi.org/10.2139/ssrn.3745935

Ramin Hassan

University of Minnesota, Finance ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.ramin-h.com/

Erik Loualiche

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

Alexandre Reggi Pecora

University of Minnesota - Twin Cities - Department of Business Finance ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Colin Ward (Contact Author)

University of Minnesota - Carlson School of Management ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
1,421
rank
249,167
PlumX Metrics