Discussion paper

DP14874 Exchange Rates and Asset Prices in a Global Demand System

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.


Koijen, R and M Yogo (2020), ‘DP14874 Exchange Rates and Asset Prices in a Global Demand System‘, CEPR Discussion Paper No. 14874. CEPR Press, Paris & London. https://cepr.org/publications/dp14874