GLOBAL AND REGIONAL RISKS IN CURRENCY RETURNS

Jairo A. Rendon ()
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Jairo A. Rendon: Departamento de Administración de Empresas, Pontificia Universidad Javeriana, Cra. 7 No. 40 - 62 Bogotá, D.C., Colombia

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 08, 1-25

Abstract: This paper presents an asset-pricing model for an integrated financial economy in a multi-currency framework in which three risk dimensions drive asset prices: global risk, regional risk and country-specific risk. Under this framework, all risks are common since, by trading assets across countries, agents can load on foreign risk. However, the model’s solution imposes restrictions on the loading coefficients. As a result, only the dispersion in global and regional coefficients is needed to explain currency returns. The model is tested with a linear-factor model at the currency-pair level using a sample of 42 countries located in five different regions. It is shown that, as the model predicted, regional and global factors help explain the dispersion in currency returns.

Keywords: Foreign exchange; asset pricing; factor model (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219024919500468

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