Working Paper: CEPR ID: DP12610
Authors: Riccardo Colacito; Mariano Massimiliano Croce; Federico Gavazzoni; Robert Ready
Abstract: Focusing on the ten most traded currencies, we provide empirical evidence regarding a significant heterogeneous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to long-lasting global growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry-trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013).
Keywords: No keywords provided
JEL Codes: C62; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global growth news shocks (F69) | currency adjustments (F31) |
| negative long-run growth shock (E19) | currency depreciation in high-exposure countries (F31) |
| negative long-run growth shock (E19) | currency appreciation in low-exposure countries (F31) |
| long-run growth news shocks (O49) | pricing of currency risk (F31) |
| exposure to long-run global growth news (F69) | riskiness of currencies (F31) |
| average carry trade (F31) | positive return during good times (G17) |
| currency adjustments (F31) | reallocation of international resources (F02) |
| long-run growth news shocks (O49) | observable patterns in currency returns (F31) |