Financial amplification of foreign exchange risk premia

Tobias Adrian, Erkko Etula and Jan Groen

No 461, Staff Reports from Federal Reserve Bank of New York

Abstract: Theories of systemic risk suggest that financial intermediaries? balance-sheet constraints amplify fundamental shocks. We provide supporting evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediaries? balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring.

Keywords: Systemic risk; Intermediation (Finance); Foreign exchange; Assets (Accounting) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-ifn and nep-upt
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Journal Article: Financial amplification of foreign exchange risk premia (2011)
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