International Capital Markets and Wealth Transfers

60 Pages Posted: 27 Apr 2022 Last revised: 23 Sep 2022

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Julien Pénasse

University of Luxembourg

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2022

Abstract

In periods of global stress, there are large movements in exchange rates and asset prices. Currencies of developed economies appreciate, with the US dollar appreciating the most. Global stock markets fall, but the US market falls by less. While the external balance sheet of the US is riskier and its net foreign assets fall, this effect is overturned by the dollar appreciation, resulting in a wealth transfer to the US. To rationalize these facts, we build a general equilibrium model with time-varying risk appetites that produces asymmetric portfolios. Richer countries have more appetite for risk, levering up their external portfolios by borrowing from poorer countries. Consequently, their net foreign assets fall in periods of stress, yet there is a wealth transfer from poor to rich countries due to currency appreciations. The model delivers time-varying currency risk premia, matches key asset pricing moments, and produces realistic external portfolios.

Keywords: Currency risk premium, habit formation, net foreign assets, wealth transfers

JEL Classification: E43, F31, G12, G15

Suggested Citation

Dahlquist, Magnus and Heyerdahl-Larsen, Christian and Pavlova, Anna and Pénasse, Julien, International Capital Markets and Wealth Transfers (September 1, 2022). Available at SSRN: https://ssrn.com/abstract=4057287 or http://dx.doi.org/10.2139/ssrn.4057287

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Julien Pénasse

University of Luxembourg ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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