Risks For The Long Run And The Real Exchange Rate
AbstractWe propose an equilibrium model that can explain a wide range of international finance puzzles, including the high correlation of international stock markets, despite the lack of correlation of fundamentals. We conduct an empirical analysis of our model, which combines cross-country-correlated long-run risk with Epstein and Zin preferences, using U.S. and U.K. data, and show that it successfully reconciles international prices and quantities, thereby solving the international equity premium puzzle. These results provide evidence suggesting a link between common long-run growth perspectives and exchange rate movements.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 794.
Date of creation: 2005
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Asset pricing; international finance; recursive utility;
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- G00 - Financial Economics - - General - - - General
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