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Currency Risk Factors in a Recursive Multicountry Economy

Riccardo Colacito, Mariano Massimiliano Croce, Federico Gavazzoni () and Robert Ready

No 12610, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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)
Date: 2018-01
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Working Paper: Currency Risk Factors in a Recursive Multi-Country Economy (2016) Downloads
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