Exchange Rates and Asset Prices in a Global Demand System

Ralph S. J. Koijen and Motohiro Yogo

Journal of Political Economy, 2026, vol. 134, issue 8, 2441 - 2487

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 long-standing 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% on the US dollar, 2.71% on US long-term debt, and 0.50% on US equity.

Date: 2026
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