Currency Risk Factors in a Recursive Multi-Country Economy

Robert Ready, Mariano Croce, Federico Gavazzoni () and Riccardo Colacito
Additional contact information
Robert Ready: University of Rochester
Mariano Croce: University of North Carolina at Chapel H
Riccardo Colacito: University of North Carolina, Chapel Hil

No 297, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Focusing on the ten most-traded currencies, we provide empirical evidence about a significant heterogenous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to global long-lasting growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013).

Date: 2016
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (18)

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Working Paper: Currency Risk Factors in a Recursive Multicountry Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:297

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