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Risky Gravity

Author

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  • Luciana Juvenal
  • Paulo Santos Monteiro

Abstract

We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.

Suggested Citation

  • Luciana Juvenal & Paulo Santos Monteiro, 2021. "Risky Gravity," Discussion Papers 21/02, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:21/02
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    More about this item

    Keywords

    Risk premia; Gravity equation; Trade collapse;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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