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International Asset Pricing with Recursive Preferences

Author

Listed:
  • Mariano Croce

    (University of North Carolina at Chapel H)

  • Riccardo Colacito

    (University of North Carolina, Chapel Hill)

Abstract

Focusing on US and UK, we document that both the Backus and Smith (1993) finding, concerning the low correlation between consumption differentials and exchange rates, and the forward-premium anomaly, concerning the tendency of high interest rate currencies to appreciate, have become more severe through time. After accounting for different capital mobility regimes, we show that these anomalies turn into general equilibriumregularities in a two-country and two-good economy with Epstein and Zin (1989) preferences, frictionless markets, and highly correlated long-run endowment growth prospects.

Suggested Citation

  • Mariano Croce & Riccardo Colacito, 2012. "International Asset Pricing with Recursive Preferences," 2012 Meeting Papers 984, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:984
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    References listed on IDEAS

    as
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    4. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
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    7. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
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