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International Asset Pricing with Risk-Sensitive Rare Events

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  • Mariano M. Croce

    (University of North Carolina at Chapel Hill)

  • Riccardo Colacito

    (University of North Carolina at Chapel Hill)

Abstract

We propose a frictionless general equilibrium model in which two international consumers with recursive preferences trade two consumption goods and a complete set of date and state contingent securities. Consumption home bias and concern for the temporal distribution of risk generate rich dynamics for international prices and quantities. In our model, exchange rate movements are as volatile as they are in the data. Furthermore, both the volatility of the exchange rate movements and risk-premia are endogenously time varying and history dependent.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 176.

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Date of creation: 2010
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Handle: RePEc:red:sed010:176

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  1. Xavier Gabaix, 2008. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," NBER Working Papers 13724, National Bureau of Economic Research, Inc.
  2. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2008. "Common Risk Factors in Currency Markets," NBER Working Papers 14082, National Bureau of Economic Research, Inc.
  3. Xavier Gabaix & Samuel Fraiberg & Romain Ranciere & Adrien Verdehlha & Emmanuel Farhi, 2010. "Crash Risk in Currency Market," 2010 Meeting Papers 640, Society for Economic Dynamics.
  4. Pavlova, Anna & Rigobon, Roberto, 2004. "Asset Prices and Exchange Rates," Working papers 4322-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
  6. Riccardo Colacito & Mariano M. Croce, 2011. "Risks for the Long Run and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 153 - 181.
  7. Joseph E. Gagnon, 1989. "Exchange rate variability and the level of international trade," International Finance Discussion Papers 369, Board of Governors of the Federal Reserve System (U.S.).
  8. Hanno Lustig & Adrien Verdelhan, 2004. "The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk," 2004 Meeting Papers 136c, Society for Economic Dynamics.
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