Exchange Rates and Asset Prices in a Global Demand System

We develop an asset demand system to study exchange rates, short-term rates, long-term yields, and equity prices across 37 countries. Using international portfolio holdings data, we estimate the asset demand system by instrumental variables. We develop a unified framework to decompose the variation in exchange rates and asset prices into portfolio flows and shifts in asset demand, to interpret economic events such as the European sovereign debt crisis, and to estimate the convenience yield on US assets. The convenience yield is 1.45 percent on the US dollar, 2.81 percent on long-term debt, and 0.50 percent on equity.