What do Financial Markets say about the Exchange Rate? / Mikhail Chernov, Valentin Haddad, Oleg Itskhoki.

Format:

Book

Author/Creator:

Chernov, Mikhail.

Contributor:

National Bureau of Economic Research.

Haddad, Valentin.

Itskhoki, Oleg.

Series:

Working Paper Series (National Bureau of Economic Research) no. w32436.

NBER working paper series no. w32436

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate that this is not necessarily the case. We develop an analytical framework that characterizes the link between exchange rates and finance across all conceivable market structures. Our findings indicate that full market segmentation is not necessary for financial shocks to explain exchange rates. Moreover, financial markets can accommodate a significant extent of international risk sharing without leading to the classic exchange rate puzzles. We identify plausible market structures where both roles coexist, addressing challenges faced when examined separately.

Notes:

Print version record

May 2024.