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Session Overview
IF-1: International Finance
Thursday, 22/Aug/2019:
15:30 - 17:00

Session Chair: Tony Zhang, Boston University
Location: D -106

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Cross-Currency Consistency, Three-Part SDF Factorizations, and an Impossibility Theorem for the Stationarity of Exchange Rates in International Economies

Gurdip Bakshi1, John Crosby2

1Temple University, United States of America; 2University of Maryland, United States of America

Discussant: Fabrice Tourre (Copenhagen Business School)

We consider an incomplete markets international economy in discrete-time. The first result is an impossibility theorem showing that if cross-currency no-arbitrage is to hold, the exchange rate cannot be a stationary process in levels. The second result is a system of stochastic discount factor (SDF) factorizations that enforce no-arbitrage in international economies. For example, the domestic SDF admits a new three-part multiplicative factorization: the inverse of (gross) exchange rate growth, a martingale, and a non-martingale component which is the reciprocal of the gross return of the foreign long-term bond. Examples and empirical work showcase our theoretical characterizations and economic insights.

efa2019-IF-1-1459-Cross-Currency Consistency, Three-Part SDF Factorizations, and an Impossibility Theorem.pdf

Global Risks in the Currency Market

George Panayotov

HKUST, Hong Kong S.A.R. (China)

Discussant: Zhengyang Jiang (Kellogg School of Management, Northwestern University)

A novel cross section of numeraire-invariant test assets, that are well-suited for studying global risks, offers new empirical findings related to US dollar risk. These findings are rationalized within the model of Lustig, Roussanov, and Verdelhan (2014), by adding to it a time-varying dispersion in the exposure to global risk, and treating the relative US interest rate as a global state variable. A test, based on the model, rejects a number of risk factors used in prior studies, indicating that global risks still present a challenge to empirical research in the currency market.

efa2019-IF-1-1604-Global Risks in the Currency Market.pdf

Time-Varying Risk Premia in Large International Equity Markets

Ines Chaieb1, Hugues Langlois2, Olivier Scaillet1

1University of Geneva, Switzerland; 2HEC Paris, France

Discussant: Thomas Maurer (Washington University)

We estimate and test factor models with time-varying loadings and risk premia for a large unbalanced panel of 62,320 individual stock returns in 46 countries. First, we check that the tested factor models achieve weak cross-sectional dependence crucial for inference on risk premia. Adding an excess country market factor to world or regional market and non-market factors captures the factor structure for both developed and emerging markets. Second, we do not reject asset pricing restrictions in up to 91% of countries. Third, we uncover significant heterogeneity in level and dynamics of factor risk premia between and within developed and emerging markets.

efa2019-IF-1-356-Time-Varying Risk Premia in Large International Equity Markets.pdf

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