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Currency Risk Factors in a Recursive Multicountry Economy

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  • RIC COLACITO
  • MARIANO M. CROCE
  • FEDERICO GAVAZZONI
  • ROBERT READY

Abstract

Focusing on the 10 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, heterogeneous 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, Roussanov, and Verdelhan and Della Corte, Riddiough, and Sarno.

Suggested Citation

  • Ric Colacito & Mariano M. Croce & Federico Gavazzoni & Robert Ready, 2018. "Currency Risk Factors in a Recursive Multicountry Economy," Journal of Finance, American Finance Association, vol. 73(6), pages 2719-2756, December.
    • Handle: RePEc:bla:jfinan:v:73:y:2018:i:6:p:2719-2756
    DOI: 10.1111/jofi.12720
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