American Economic Review Vol. 109 No. 6 2019

Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?

Hanno Lustig¹; Adrien Verdelhan²

¹ Stanford Graduate School of Business, 355 Knight Way, Stanford, CA 94305 (email: ) · ² MIT Sloan School of Management, 100 Main Street, E62-621, Cambridge, MA 02139 (email: )

Abstract

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.

DOI

10.1257/aer.20160409

Volume

109

Issue

6

Pages

2208-2244

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓