Asset Prices and Risk Sharing in Open Economies

Stathopoulos, Andreas

doi:10.2139/ssrn.1364082

Cited by 35 publications

(15 citation statements)

References 59 publications

(90 reference statements)

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“…In particular, they investigate the predicted capital outflows and inflows, relate them to portfolio growth and portfolio reallocation, 7 and assess the performance of the model looking at balance of payments statistics on capital flows. Other recent work that tackles the challenge of solving for portfolio choice are Hnatkovska (2006 and2008) and Judd, Kubler, and Schmedders (2002). The methods developed in Evans and Hnatkovska (2008) and Judd, Kubler, and Schmedders (2002) can be applied to very general classes of models, but are quite complex and present significant departures from standard DSGE solution methods.…”

Section: Methodological Breakthroughmentioning

confidence: 99%

“…Equities are used to hedge sources of risks that cannot be hedged through the bond positions, in particular the part of nontradable income risk that is orthogonal to bond returns. In 22 As described in section 4.2.5, recent contributions with multiple asset classes include Matsumoto (2009a, 2009b), , Coeurdacier and Gourinchas (2011), Berriel and Bhattarai (2008), and Sutherland (2007 and2008). this new literature, the optimal equity position depends therefore on the correlation of returns on equity with returns on nontradable income, conditional on bond returns.…”

Section: Hedging Motives In a Benchmark Model With Multiple Asset Clamentioning

confidence: 99%

“…This does not mean that the mechanisms highlighted would not survive in more general environments able to generate realistic asset prices but this remains to be seen. First attempts in that direction include Stathopoulos (2008Stathopoulos ( , 2011 who introduces habit formation and Benigno and Nistico (2009) who model ambiguity aversion. Interestingly, Benigno and Nistico (2009) show that, taking into account long run consumption risk, which is correlated with the real exchange rate, changes the properties of the pricing kernel and rationalizes home bias.…”

Section: Exchange Rates and Asset Pricesmentioning

confidence: 99%

See 2 more Smart Citations

Home Bias in Open Economy Financial Macroeconomics

Coeurdacier

Rey

2013

Journal of Economic Literature

360

189

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Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modeling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and nontradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), and (iii) informational frictions and behavioral biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on cross-border asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modeling of the open economy and a growing literature of models of delegated investment. (JEL E13, F41, G11, G12, G15)

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Section: Methodological Breakthroughmentioning

confidence: 99%

Section: Hedging Motives In a Benchmark Model With Multiple Asset Clamentioning

confidence: 99%

Section: Exchange Rates and Asset Pricesmentioning

confidence: 99%

See 1 more Smart Citation

Home Bias in Open Economy Financial Macroeconomics

Coeurdacier

Rey

2013

Journal of Economic Literature

360

189

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“…More generally, this includes the idea that some goods are so prohibitively expensive to ship that they are essentially nontraded. An alternative would be to endow each country's consumers with a stronger preference for domestically produced consumption goods relative to foreign goods, as used in an international macroeconomics setting, for example, by Backus, Kehoe, and Kydland (1994), and in the context of international asset pricing by Pavlova and Rigobon (2007), Colacito and Croce (2010), and Stathopoulos (2011). We employ the classic Backus, Kehoe, and Kydland (1994) specification largely for tractability.…”

Section: B Dynamicsmentioning

confidence: 99%

Commodity Trade and the Carry Trade: A Tale of Two Countries

Ready

Roussanov

Ward³

2017

The Journal of Finance

129

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Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity‐producing countries from global productivity shocks, forcing final‐good producers to absorb them. Commodity‐currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

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“…Our study is also related to the growing literature that investigates the macroeconomic foundations of international financial market fluctuations (see, e.g., Verdelhan (2010), Stathopoulos (2012), Hassan (2013), Heyerdahl-Larsen (2014), Farhi and Gabaix (2015)). Our empirical evidence on the 2007 Great Recession is related to work on rare disasters (Barro (2006), Gabaix (2012), Gourio (2012)) and its applications to international finance (see, e.g., Gourio, Siemer, and Verdelhan (2014)).…”

mentioning

confidence: 93%

Currency Risk Factors in a Recursive Multicountry Economy

Colacito¹,

Croce²,

Gavazzoni³

et al. 2018

The Journal of Finance

106

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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.

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Asset Prices and Risk Sharing in Open Economies

Cited by 35 publications

References 59 publications

Home Bias in Open Economy Financial Macroeconomics

Home Bias in Open Economy Financial Macroeconomics

Commodity Trade and the Carry Trade: A Tale of Two Countries

Currency Risk Factors in a Recursive Multicountry Economy

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