Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?
Name
aer.20160409.pdf
Description
Published version
Size
895.89 KB
Format
Adobe PDF
Checksum (MD5)
1414c894c57242cd2c6e7ed0e73025d7
Author(s)
Lustig, Hanno
Verdelhan, Adrien
Date Issued
2019
Journal
American Economic Review
Publisher
American Economic Association
Version
Final published version
Abstract
© 2019 American Economic Association. All rights reserved. We assume that domestic ( foreign) agents, when investing abroad, can only trade in the foreign (domestic) risk- free rates. In a preference-free environment, we derive the exchange rate volatility and risk premia in any such incomplete spanning model, as well as a measure of exchange rate cyclicality. We find that incomplete spanning lowers the volatility of exchange rate, increases the risk premia but only by creating exchange rate predictability, and does not affect the exchange rate cyclicality.
MIT Department
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/AER.20160409
