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Working Paper
Global asset pricing
Financial markets have become increasingly global in recent decades, yet the pricing of internationally traded assets continues to depend strongly upon local risk factors, leading to several observations that are difficult to explain with standard frameworks. Equity returns depend upon both domestic and global risk factors. Further, local investors tend to overweight their asset portfolios in local equity. The stock prices of firms that begin to trade across borders increase in response to this information.> ; Foreign exchange markets also display anomalous relationships. The forward rate ...
Working Paper
How Can Asset Prices Value Exchange Rate Wedges?
When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial ...
Working Paper
Disaster Risk and Asset Returns : An International Perspective
Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the ...
Working Paper
Does foreign exchange intervention signal future monetary policy?
A frequently cited explanation for why foreign exchange interventions affect the exchange rate is that these interventions signal future monetary policy intentions. This explanation says that central banks signal a more contractionary monetary policy in the future by buying domestic currency today. Therefore, the expectations of future tighter monetary policy make the domestic currency appreciate, even though the current monetary effects of the intervention are typically offset by central banks. Of course, this explanation presumes that central banks, in fact, back up interventions with ...
Journal Article
Global stock market linkages reduce potential for diversification
Recent European government debt difficulties demonstrate how linked stock markets have become. Problems in countries such as Greece and Italy have depressed stock markets not only on the continent but also in the United States. Such comovement across international financial markets highlights U.S. equity markets? exposure to foreign markets.
Working Paper
Consumption, stock returns, and the gains from international risk-sharing
Standard theoretical models predict that domestic residents should diversify their portfolios into foreign assets much more than observed in practice. Whether this lack of diversification is important depends on the potential gains from risk-sharing. General equilibrium models and consumption data tend to find that the costs are small, typically less than 0.5% of permanent consumption. On the other hand, stock returns imply gains that are several hundred times larger. In this paper, the author examines the reasons for these differences and finds that the primary differences are due to (a) the ...