Journal of Financial Economics Vol. 148 No. 1 2023
The global factor structure of exchange rates
open access
Abstract
We propose a model-free methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international stocks, bonds, and currencies in markets with frictions. We theoretically establish a SDF decomposition into one global factor and a currency basket. We show that our global factor prices a large cross-section of international asset returns , not just in- but also out-of-sample, across different currency denominations. Moreover, the pricing ability of the global factor is largely independent of the market structure or the size and type of market friction.
- DOI
- 10.1016/j.jfineco.2023.01.005
- Volume
- 148
- Issue
- 1
- Pages
- 21-46
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref