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Currency Risk Factors in a Recursive Multicountry Economy

Author

Listed:
  • Croce, Mariano
  • Gavazzoni, Federico
  • Colacito, Ric
  • 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

  • Croce, Mariano & Gavazzoni, Federico & Colacito, Ric & 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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    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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