How Can Asset Prices Value Exchange Rate Wedges?

Karen Lewis and Edith Liu

No 17596, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial markets through exchange rate adjustment has significant implications for welfare.

Keywords: International spillovers; Incomplete and complete markets (search for similar items in EconPapers)
JEL-codes: F30 F31 F41 G10 G15 (search for similar items in EconPapers)
Date: 2022-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17596 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: How Can Asset Prices Value Exchange Rate Wedges? (2022)
Working Paper: How Can Asset Prices Value Exchange Rate Wedges? (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17596

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17596

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().