DP14874 Exchange Rates and Asset Prices in a Global Demand System
|Author(s):||Ralph Koijen, Motohiro Yogo|
|Publication Date:||June 2020|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14874|
Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices; interpreting major economic events such as the European sovereign debt crisis; and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 on US equity.