Pricing Risk Globally: Intermediary Constraints, the Dollar, and the Global Financial Cycle

Ozge Akinci, Sebnem Kalemli-Ozcan and Albert Queralto

No 17472, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In our model, higher uncertainty tightens intermediary constraints and lowers asset prices, reversing the counterfactual asset price increase in frictionless models. Because constraints make net worth especially valuable in bad times, risk premia respond strongly to uncertainty shocks. This interaction allows the model to match the credit spread, currency premium, and dollar responses in the data.

Keywords: Financial frictions; Risk premia; Time-varying uncertainty; Intermediary asset pricing; Financial spillovers; Global financial cycle (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Date: 2022-07
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