International Asset Pricing with Recursive Preferences

Mariano Croce and Riccardo Colacito ()
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Mariano Croce: University of North Carolina at Chapel H

No 984, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Focusing on US and UK, we document that both the Backus and Smith (1993) finding, concerning the low correlation between consumption differentials and exchange rates, and the forward-premium anomaly, concerning the tendency of high interest rate currencies to appreciate, have become more severe through time. After accounting for different capital mobility regimes, we show that these anomalies turn into general equilibriumregularities in a two-country and two-good economy with Epstein and Zin (1989) preferences, frictionless markets, and highly correlated long-run endowment growth prospects.

Date: 2012
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Journal Article: International Asset Pricing with Recursive Preferences (2013)
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