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Marriott Philadelphia Downtown, Meeting Room 403
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Econometric Society
asset prices. Countries which are more central in the global trade network have lower
interest rates and currency risk premia. To explain these findings, I present a general
equilibrium model where central countries’ consumption growth is more exposed
to global consumption growth shocks. This causes the currencies of central countries
to appreciate in bad times, resulting in lower interest rates and currency risk premia.
Empirically, central countries’ consumption growth covaries more with world consumption
growth and their equity Sharpe ratios are higher, further validating the proposed
mechanism.
Advances in International Finance
Paper Session
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Matteo Maggiori, Harvard University
Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?
Abstract
Compared to the predictions of complete market models,Trade Network Centrality and Currency Risk Premia
Abstract
I uncover an economic source of exposure to global risk that drives internationalasset prices. Countries which are more central in the global trade network have lower
interest rates and currency risk premia. To explain these findings, I present a general
equilibrium model where central countries’ consumption growth is more exposed
to global consumption growth shocks. This causes the currencies of central countries
to appreciate in bad times, resulting in lower interest rates and currency risk premia.
Empirically, central countries’ consumption growth covaries more with world consumption
growth and their equity Sharpe ratios are higher, further validating the proposed
mechanism.
Volatility Risk Pass-through
Abstract
We show novel empirical evidence on the significance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G-17 countries, we document that: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) consumption differentials vol and exchange rate vol are disconnected. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel and rich risk-sharing of vol shocks.Discussant(s)
Andreas Stathopoulos
,
University of Washington
Luigi Bocola
,
Northwestern University
Rosen Valchev
,
Boston College
Pasquale Della Corte
,
Imperial College London and CEPR
JEL Classifications
- A1 - General Economics