DP12610 Currency Risk Factors in a Recursive Multicountry Economy
|Author(s):||Riccardo Colacito, Mariano Massimiliano Croce, Federico Gavazzoni, Robert Ready|
|Publication Date:||January 2018|
|JEL(s):||C62, F31, G12|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12610|
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).