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Currency Risk Factors in a Recursive Multicountry Economy

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  • Colacito, Riccardo
  • Croce, Mariano Massimiliano
  • Gavazzoni, Federico
  • Ready, Robert

Abstract

Focusing on the ten most traded currencies, we provide empirical evidence regarding a significant heterogeneous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to long-lasting global growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry-trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013).

Suggested Citation

  • Colacito, Riccardo & Croce, Mariano Massimiliano & Gavazzoni, Federico & Ready, Robert, 2018. "Currency Risk Factors in a Recursive Multicountry Economy," CEPR Discussion Papers 12610, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12610
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    Cited by:

    1. Maggiori, Matteo & Neiman, Brent & Schreger, Jesse, 2018. "International Currencies and Capital Allocation," CEPR Discussion Papers 12973, C.E.P.R. Discussion Papers.
    2. Mueller, Philippe & Stathopoulos, Andreas & Vedolin, Andrea, 2017. "International correlation risk," LSE Research Online Documents on Economics 84140, London School of Economics and Political Science, LSE Library.
    3. Malamud, Semyon & Schrimpf, Andreas, 2018. "An Intermediation-Based Model of Exchange Rates," CEPR Discussion Papers 13182, C.E.P.R. Discussion Papers.
    4. Hassan, Tarek A. & Mertens, Thomas M. & Zhang, Tony, 2016. "Not so disconnected: Exchange rates and the capital stock," Journal of International Economics, Elsevier, vol. 99(S1), pages 43-57.
    5. Charles W. Calomiris & Harry Mamaysky, 2019. "Monetary Policy and Exchange Rate Returns: Time-Varying Risk Regimes," NBER Working Papers 25714, National Bureau of Economic Research, Inc.
    6. Riccardo Colacito & Steven J. Riddiough & Lucio Sarno, 2019. "Business Cycles and Currency Returns," NBER Working Papers 26299, National Bureau of Economic Research, Inc.
    7. Aleksejs Krecetovs & Pasquale Della Corte, 2016. "Macro uncertainty and currency premia," 2016 Meeting Papers 624, Society for Economic Dynamics.
    8. Weithing Zhang & Thomas Mertens & Tarek Hassan, 2014. "Currency Manipulation," 2014 Meeting Papers 401, Society for Economic Dynamics.
    9. Joel M. David & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    10. Pasquale Della Corte & Steven J. Riddiough & Lucio Sarno, 2016. "Currency Premia and Global Imbalances," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2161-2193.
    11. Harjoat S. Bhamra & Raman Uppal, 2019. "Does Household Finance Matter? Small Financial Errors with Large Social Costs," American Economic Review, American Economic Association, vol. 109(3), pages 1116-1154, March.
    12. Zhenzhen Fan & Juan M. Londono & Xiao Xiao, 2019. "US Equity Tail Risk and Currency Risk Premia," International Finance Discussion Papers 1253, Board of Governors of the Federal Reserve System (U.S.).
    13. Gurdip Bakshi & Mario Cerrato & John Crosby, 2016. "Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies," Working Papers 2017_01, Business School - Economics, University of Glasgow.
    14. Berg, Kimberly A. & Mark, Nelson C., 2018. "Global macro risks in currency excess returns," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 300-315.
    15. Colacito, Riccardo & Croce, Mariano Massimiliano & Ho, Steven & Howard, Philip, 2018. "BKK the EZ Way. International Long-Run Growth News and Capital Flows," CEPR Discussion Papers 12783, C.E.P.R. Discussion Papers.
    16. Lorenzo Garlappi & Jack Favilukis, 2015. "The Carry Trade and UIP when Markets are Incomplete," 2015 Meeting Papers 242, Society for Economic Dynamics.
    17. Aleksandra Babii, 2019. "Exchange Rates Co-movement and International Trade," 2019 Meeting Papers 1150, Society for Economic Dynamics.
    18. Mangirdas Morkunas & Gintaras Cernius & Gintare Giriuniene, 2019. "Assessing Business Risks of Natural Gas Trading Companies: Evidence from GET Baltic," Energies, MDPI, Open Access Journal, vol. 12(14), pages 1-14, July.

    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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