Model-Free International Stochastic Discount Factors

Mirela Sandulescu, Fabio Trojani and Andrea Vedolin
Additional contact information
Mirela Sandulescu: University of Lugano and Swiss Finance Institute
Fabio Trojani: University of Geneva and Swiss Finance Institute
Andrea Vedolin: Boston University

No 18-18, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We provide a theoretical characterization of international stochastic discount factors (SDFs) in incomplete markets under different degrees of market segmentation. Using 40 years of data on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent and transitory components. We find that large permanent SDF components help to reconcile the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. However, integrated markets entail highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries' risk-bearing capacity and model-free international SDFs. We interpret this evidence through the lens of an economy with two building blocks: limited participation by households and financiers who face an intermediation friction.

Keywords: Stochastic Discount Factor; Exchange Rates; Market Segmentation; Market Incompleteness; Financial Intermediaries (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2018-06
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3070739 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1818

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().