The global factor structure of exchange rates

Sofonias Alemu Korsaye, Fabio Trojani and Andrea Vedolin

Journal of Financial Economics, 2023, vol. 148, issue 1, 21-46

Abstract: We propose a model-free methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international stocks, bonds, and currencies in markets with frictions. We theoretically establish a SDF decomposition into one global factor and a currency basket. We show that our global factor prices a large cross-section of international asset returns, not just in- but also out-of-sample, across different currency denominations. Moreover, the pricing ability of the global factor is largely independent of the market structure or the size and type of market friction.

Keywords: Stochastic discount factor; Factor models; Financial frictions; Market segmentation (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:148:y:2023:i:1:p:21-46

DOI: 10.1016/j.jfineco.2023.01.005

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