Currency Risk Factors in a Recursive Multicountry Economy

Ric Colacito, Mariano M. Croce, Federico Gavazzoni and Robert Ready

Journal of Finance, 2018, vol. 73, issue 6, 2719-2756

Abstract: Focusing on the 10 most traded currencies, we provide empirical evidence regarding a significant heterogeneous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk‐sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short‐ and long‐run shocks. Since news shocks are priced, heterogeneous exposure to long‐lasting global growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML‐FX and HML‐NFA carry‐trade strategies studied by Lustig, Roussanov, and Verdelhan and Della Corte, Riddiough, and Sarno.

Date: 2018
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https://doi.org/10.1111/jofi.12720

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:73:y:2018:i:6:p:2719-2756

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