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Currency Risk Factors in a Recursive Multi-Country Economy

Author

Listed:
  • Robert Ready

    (University of Rochester)

  • Mariano Croce

    (University of North Carolina at Chapel H)

  • Federico Gavazzoni

    (INSEAD)

  • Riccardo Colacito

    (University of North Carolina, Chapel Hil)

Abstract

Focusing on the ten most-traded currencies, we provide empirical evidence about a significant heterogenous 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 global long-lasting 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

  • Robert Ready & Mariano Croce & Federico Gavazzoni & Riccardo Colacito, 2016. "Currency Risk Factors in a Recursive Multi-Country Economy," 2016 Meeting Papers 297, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:297
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    References listed on IDEAS

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    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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