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International capital markets structure, preferences and puzzles: A “US–China World”

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  • Caporale, Guglielmo Maria
  • Donadelli, Michael
  • Varani, Alessia

Abstract

The US–China data suggest that (i) the real exchange rate (RER) volatility puzzle (high RER volatility relative to consumption volatility), (ii) the Backus–Smith anomaly (negative correlation between the RER and consumption differentials), (iii) the consumption correlation puzzle (relatively low cross-country consumption correlation) became more severe in the aftermath of China's stock market liberalization. This indicates that international macro-anomalies do not show up exclusively among pairs of advanced economies. In an international endowment economy context, we show that the combination of recursive preferences and long-run risk allows for the simultaneous resolution of these anomalies. In contrast to standard macro models, this holds even in the presence of full financial integration, segmented goods markets and non-negligible changes in several parameter values.

Suggested Citation

  • Caporale, Guglielmo Maria & Donadelli, Michael & Varani, Alessia, 2015. "International capital markets structure, preferences and puzzles: A “US–China World”," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 85-99.
  • Handle: RePEc:eee:intfin:v:36:y:2015:i:c:p:85-99
    DOI: 10.1016/j.intfin.2014.12.006
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    References listed on IDEAS

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    Cited by:

    1. Grüning, Patrick, 2017. "International endogenous growth, macro anomalies, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 118-148.
    2. Monica Billio & Michael Donadelli & Antonio Paradiso & Max Riedel, 2015. "Measuring Financial Integration: Lessons from the Correlation," Working Papers 2015:23, Department of Economics, University of Venice "Ca' Foscari".

    More about this item

    Keywords

    Macro-anomalies; Financial autarky; Complete markets; Long-run innovations; Home bias;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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