6 Factors That Influence Exchange Rates
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A Reply, with Hanno Lustig. American Economic ReviewDecemberVol. The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption and market betas increase during recessions and times of crisis.
Evidence from the U. Treasury Market, with George J. Relative importance of macroeconomic news announcements versus variation in fx trading and exchange rate dynamics pdf liquidity in explaining the observed jumps in the U. The long-run risk model, which is successful at matching the wealth-consumption ratio, high equity risk premium and the nominal yields at short maturities implies too little much variation in the martingale component of the nominal real pricing kernel.
NovemberThis Version: Journal of FinanceFebruaryVol. American Economic ReviewMarchvol. Data We sort foreign currency returns into portfolios based on foreign interest rates, and we test the Euler equation of a domestic investor who invests in these currency portfolios. These bets are very risky if your neighbor's IMRS is not correlated with yours, but they provide a hedge when his IMRS is highly correlated and more volatile.
Persistent and systematic arbitrage opportunities post-crisis in one of the largest asset markets; the causal impact of banking regulation. Market incompleteness cannot solve the FX volatility, cyclicality, and risk premium puzzles at the same time. A two-country model with incomplete markets that replicates equity risk premia in order to study equity and debt capital flows. Common, price-based factors describe exchange rate dynamics at intra-day frequencies as well as the quantity-based order flows.
Capital inflows respond to both systematic and country-specific shocks to volatility, and they respond more in high uncertainty beta countries. Three factors equity, dollar, and carry describe the cross-section of equity returns from 46 developed and emerging countries from to the present. Long-term bond returns behave as if nominal exchange rates were stationary in levels, contrary to the academic consensus.
Sovereign optimal defaults and bond prices depend not only fx trading and exchange rate dynamics pdf the borrowers' economic conditions, but also on the lenders' time-varying risk aversion. After the fall ofcurrency options prices exhibit a sharp increase in tail risk, similar to the emergence of fx trading and exchange rate dynamics pdf smirk in equity options after the crash.
We estimate a simple structural model that includes both Gaussian and fx trading and exchange rate dynamics pdf risk. SDFs must feature two global shocks. The average forward discount and U.
The consumption risk premium is only 2. Most of wealth is human wealth. Events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth. A two-country real business cycle model generates fx trading and exchange rate dynamics pdf low correlation between relative consumption growth and exchange rates, a large forward premium, and "excess comovement" of asset prices relative to quantities.
Value-maximizing managers face much higher risk-adjusted costs of capital in their investment decisions during recessions than expansions.
Carry trade investors load up on global volatility risk. We sort foreign currency returns into portfolios based on foreign interest rates, and we test the Euler equation of a domestic investor who invests in these currency portfolios. June ; This version: Novemberpdf appendix. May ; This version: Octoberpdf appendix. Winner of the Terker Prize in Investment Research,