Currency Risk Factors in a Recursive Multicountry Economy
Mariano Massimiliano Croce,
Federico Gavazzoni () and
No 12610, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Focusing on the ten 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, heterogenous 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 et al. (2011) and Della Corte et al. (2013).
JEL-codes: C62 F31 G12 (search for similar items in EconPapers)
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Working Paper: Currency Risk Factors in a Recursive Multi-Country Economy (2016)
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