EconPapers    
Economics at your fingertips  
 

Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?

Hanno Lustig and Adrien Verdelhan ()

No 22023, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Compared to the predictions of complete market models, actual exchange rates are puzzlingly smooth and only weakly correlated with macro-economic fundamentals, suggesting that market incompleteness plays a key role in exchange rate dynamics. Incompleteness in international financial markets introduces a stochastic wedge between the growth rates of marginal utility at home and abroad, and the change in the exchange rate. We derive a preference-free upper bound on the effects of the FX wedges. Even if domestic agents can invest only in the foreign risk-free asset, incomplete spanning fails to simultaneously match the exchange rate volatility, cyclicality and the FX risk premia in the data.

JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-ifn and nep-upt
Note: AP EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Hanno Lustig & Adrien Verdelhan, 2019. "Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?," American Economic Review, vol 109(6), pages 2208-2244.

Downloads: (external link)
http://www.nber.org/papers/w22023.pdf (application/pdf)

Related works:
Working Paper: Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates? (2016) Downloads
Working Paper: Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates? (2016) Downloads
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:nbr:nberwo:22023

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22023

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2024-03-31
Handle: RePEc:nbr:nberwo:22023