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The Global Factor Structure of Exchange Rates / Sofonias Korsaye, Fabio Trojani, Andrea Vedolin.
- Format:
- Book
- Author/Creator:
- Korsaye, Sofonias.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w27892.
- NBER working paper series no. w27892
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2020.
- Summary:
- We provide a model-free framework to study the global factor structure of exchange rates. To this end, we propose a new methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international assets, such as stocks, bonds, and currencies, in the presence of frictions. We theoretically establish a two-factor representation for the cross-section of international SDFs, consisting of one global and one local factor, which is independent of the currency denomination. We show that our two-factor specification prices a large cross-section of international asset returns, not just in- but also out-of-sample with R2s of up to 80%.
- Notes:
- Print version record
- October 2020.
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