The Global Factor Structure of Exchange Rates

Sofonias Korsaye, Fabio Trojani and Andrea Vedolin

No 27892, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a model-free framework to study the global factor structure of exchange rates. To this end, we propose a new methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international assets, such as stocks, bonds, and currencies, in the presence of frictions. We theoretically establish a two-factor representation for the cross-section of international SDFs, consisting of one global and one local factor, which is independent of the currency denomination. We show that our two-factor specification prices a large cross-section of international asset returns, not just in- but also out-of-sample with R2s of up to 80%.

JEL-codes: F3 F31 G15 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-ifn and nep-opm
Note: AP
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Published as Sofonias Alemu Korsaye & Fabio Trojani & Andrea Vedolin, 2023. "The global factor structure of exchange rates," Journal of Financial Economics, vol 148(1), pages 21-46.

Downloads: (external link)
http://www.nber.org/papers/w27892.pdf (application/pdf)

Related works:
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:27892

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27892

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 ().