Assistant Professor of Finance
Journal Article | Journal of Finance | 73 | December 2018
Currency Risk Factors in a Recursive Multi-Country Economy
Focusing on the ten most-traded currencies, the authors provide empirical evidence about a significant heterogenous exposure to global growth news shocks.They 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.Their 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).