Exchange Rates and Asset Prices in a Global Demand System

Ralph Koijen and Motohiro Yogo

No 27342, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop an asset demand system to analyze the equilibrium relation between international portfolio holdings and flows, exchange rates, and asset prices across all countries. We introduce a nested logit model of asset demand, for which we develop a new identification strategy by instrumental variables. Averaged across years and issuer countries, the demand elasticities are 27.9 for short-term debt, 3.2 for long-term debt, and 1.2 for equity. These demand elasticities are empirical targets for international macro models that feature inelastic demand to resolve longstanding puzzles in international finance. We use the estimated demand system to decompose the variation in exchange rates and asset prices into portfolio flows and shifts in asset demand, to interpret economic events such as the European sovereign debt crisis, and to estimate the convenience yields on US assets. In units of annual expected returns, the convenience yield is 1.41 percent on the US dollar, 2.71 percent on US long-term debt, and 0.50 percent on US equity.

JEL-codes: E52 F31 G12 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (39)

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Working Paper: Exchange Rates and Asset Prices in a Global Demand System (2020)
Working Paper: Exchange Rates and Asset Prices in a Global Demand System (2020)
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