The risk premium and long-run global imbalances

Chien, YiLi; Naknoi, Kanda

doi:10.1016/j.jmoneco.2015.04.001

Cited by 16 publications

(6 citation statements)

References 52 publications

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“…Our paper introduces the Chien, Cole andLustig (2011, 2012) heterogeneous trading technologies in a two-country Lucas (1982) model. Chien and Naknoi (2015) use a two-country Lucas model with limited participation that is similar to ours to study global imbalances. Dou and Verdelhan (2015) explain volatility of international equity and bond flows in a two-country framework with segmented asset market.…”

Section: Introductionmentioning

confidence: 99%

Why are exchange rates so smooth? A household finance explanation

Chien

Lustig²,

Naknoi

2020

Journal of Monetary Economics

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Empirical moments of asset prices and exchange rates imply that pricing kernels have to be almost perfectly correlated across countries. If they are not, observed real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the crosscountry correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with heterogeneous trading technologies for households and a home bias in consumption. In our model, only a small fraction of households actively participate in international risk sharing by frequently trading domestic and foreign equities. These active traders, who induce high cross-country correlation to the pricing kernels, are the marginal investors in foreign exchange markets. In a calibrated version of our model, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile pricing kernels and weakly correlated macro fundamentals.JEL codes: G15, G12, F31, F10.

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Section: Introductionmentioning

confidence: 99%

Why are exchange rates so smooth? A household finance explanation

Chien

Lustig²,

Naknoi

2020

Journal of Monetary Economics

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“…SeeGourinchas and Rey (2007);Chien and Naknoi (2015); and Wang, Wen, and Zhiwei (2015) among others.2 It also turns negative during the early 1980s, the Tequila Crisis of 1994, the Asian financial crisis of 1997-98, and the European debt crisis of 2012-14.…”

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The United States as a Global Financial Intermediary and Insurer

Monge‐Naranjo

2020

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T he press, politicians, and academics have focused attention on the large and sustained negative U.S. trade and current account imbalances since their inception in the 1970s. Much of this attention has cast blame on protectionist practices of foreign countries, especially Japan in the 1980s and China most recently. Two important considerations are often ignored: First, the counterpart of a deficit in the current account is a positive net capital inflow. That is, any country with a current account deficit must also be getting capital inflows to finance either domestic investments or consumption. Shutting down those inflows would require a reduction in domestic investments and consumption or possibly both. Second, and more interestingly, American investors can use capital inflows from the rest of the world to finance their own investments abroad. In other words, Americans can be investing in the rest of the world at the same time that foreigners are investing in the United States. This allows both sides to diversify their asset holdings. Over long periods, American investors have obtained rates of return from their foreign assets that exceed the rates of return on foreign holdings of U.S. assets. The first column of the table shows estimates from Gourinchas, Rey, and Govillot (2017), who find that from 1952 to 2015, American investors obtained a 5.8 percent rate of return on their foreign investments, while foreign investors obtained only 3.

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“…Related works also include Ohanian and Wright (), Carroll and Jeanne (), Durdu et al . (), Wen (, ), Buera and Shin (), Sandri (), Chien and Naknoi (), Song et al . (), Andolfatto () and Gourinchas and Jeanne (), among many others…”

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confidence: 99%

“…holdings of foreign capital stocks) and this small risk premium leads to a positive net factor payment (interest payment minus FDI earnings). To overcome the computational challenge under aggregate risk, Chien and Naknoi () simplify the MQR model to a pure endowment economy and use a special algorithm to solve the model numerically. They show that with aggregate uncertainty (stochastic output growth), the model can generate a large risk premium between equity and risk‐free bonds and thus is able to generate long‐term trade deficits for the US.…”

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Two‐Way Capital Flows and Global Imbalances

Wang

Wen

2016

The Economic Journal

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This article shows how underdeveloped financial markets in emerging economies can explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States). Our calibrated model reproduces China's rising financial capital outflows and FDI inflows as well as its massive trade imbalances in recent decades. Our model also predicts that global trade imbalances may be sustainable even in the long run and the conventional wisdom that the 'saving glut' of emerging economies is responsible for the global low interest rate may be wrong.

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The risk premium and long-run global imbalances

Cited by 16 publications

References 52 publications

Why are exchange rates so smooth? A household finance explanation

Why are exchange rates so smooth? A household finance explanation

The United States as a Global Financial Intermediary and Insurer

Two‐Way Capital Flows and Global Imbalances

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