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Risky Gravity

Luciana Juvenal and Paulo Santos Monteiro ()

Discussion Papers from Department of Economics, University of York

Abstract: We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.

Keywords: Risk premia; Gravity equation; Trade collapse (search for similar items in EconPapers)
JEL-codes: F12 F41 F44 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-int, nep-opm, nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:21/02

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