Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v68y2013i6p2651-2686.html
   My bibliography  Save this article

International Asset Pricing with Recursive Preferences

Author

Listed:
  • RICCARDO COLACITO
  • MARIANO M. CROCE
Abstract
Focusing on data from the United States and the United Kingdom, we document that both the anomaly identified by Backus and Smith, which concerns the low correlation between consumption differentials and exchange rates, and the forward premium anomaly, which concerns the tendency of high interest rate currencies to appreciate, have become more severe over time. Taking into account different capital mobility regimes, we show that these anomalies turn into general equilibrium regularities in a two‐country and two‐good economy with Epstein and Zin preferences, frictionless markets, and correlated long‐run growth prospects.

Suggested Citation

  • Riccardo Colacito & Mariano M. Croce, 2013. "International Asset Pricing with Recursive Preferences," Journal of Finance, American Finance Association, vol. 68(6), pages 2651-2686, December.
    • Handle: RePEc:bla:jfinan:v:68:y:2013:i:6:p:2651-2686
    DOI: 10.1111/jofi.12088
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jofi.12088
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jofi.12088?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
    2. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    3. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    4. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    5. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    6. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    7. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    8. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    9. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    10. David K. Backus & Gregor W. Smith, 1992. "Consumption and Real Exchange Rates in Dynamic Exchange Economies with Nontraded Goods," Working Papers 92-7, New York University, Leonard N. Stern School of Business, Department of Economics.
    11. repec:oup:rfinst:v:26:y::i:1:p:1-33 is not listed on IDEAS
    12. Quinn, Dennis, 1997. "The Correlates of Change in International Financial Regulation," American Political Science Review, Cambridge University Press, vol. 91(3), pages 531-551, September.
    13. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    14. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc.
    15. Anderson, Evan W., 2005. "The dynamics of risk-sensitive allocations," Journal of Economic Theory, Elsevier, vol. 125(2), pages 93-150, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Croce & Colacito, 2008. "Risk sharing for the long-run. The benefits from financial integration," 2008 Meeting Papers 985, Society for Economic Dynamics.
    2. Yang Liu & Mariano Croce & Ivan Shaliastovich & Ric Colacito, 2016. "Volatility Risk Pass-Through," 2016 Meeting Papers 135, Society for Economic Dynamics.
    3. 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.
    4. Jianfeng Yu, 2011. "A sentiment-based explanation of the forward premium puzzle," Globalization Institute Working Papers 90, Federal Reserve Bank of Dallas.
    5. Tarek A. Hassan & Tony Zhang, 2021. "The Economics of Currency Risk," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 281-307, August.
    6. Ric Colacito & Max Croce & Steven Ho & Philip Howard, 2018. "BKK the EZ Way: International Long-Run Growth News and Capital Flows," American Economic Review, American Economic Association, vol. 108(11), pages 3416-3449, November.
    7. Gourio, François & Siemer, Michael & Verdelhan, Adrien, 2013. "International risk cycles," Journal of International Economics, Elsevier, vol. 89(2), pages 471-484.
    8. Karen K. Lewis, 2011. "Global Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 435-466, December.
    9. Riccardo Colacito & Mariano M. Croce, 2010. "The Short and Long Run Benefits of Financial Integration," American Economic Review, American Economic Association, vol. 100(2), pages 527-531, May.
    10. A Craig Burnside & Jeremy J Graveline, 2020. "On the Asset Market View of Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 33(1), pages 239-260.
    11. Adrien Verdelhan, 2010. "A Habit‐Based Explanation of the Exchange Rate Risk Premium," Journal of Finance, American Finance Association, vol. 65(1), pages 123-146, February.
    12. Liu, Yang & Shaliastovich, Ivan, 2022. "Government policy approval and exchange rates," Journal of Financial Economics, Elsevier, vol. 143(1), pages 303-331.
    13. Lustig, Hanno & Verdelhan, Adrien, 2016. "Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?," Research Papers 3412, Stanford University, Graduate School of Business.
    14. Yu, Jianfeng, 2013. "A sentiment-based explanation of the forward premium puzzle," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 474-491.
    15. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    16. 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.
    17. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    18. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    19. 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.
    20. Javier Bianchi & Saki Bigio & Charles Engel, 2021. "Scrambling for Dollars: International Liquidity, Banks and Exchange Rates," Working Papers 786, Federal Reserve Bank of Minneapolis.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:68:y:2013:i:6:p:2651-2686. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.