Journal of Political Economy Vol. 119 No. 1 2011

Risks for the Long Run and the Real Exchange Rate

Riccardo Colacito^1,2; Mariano Massimiliano Croce^1,3,4

¹ University of North Carolina at Chapel Hill · ² Flagler College · ³ Centre for Economic Policy Research · ⁴ Bocconi University

Abstract

We propose an equilibrium model that can explain a wide range of international finance puzzles, including the high correlation of international stock markets, despite the lack of correlation of fundamentals. We conduct an empirical analysis of our model, which combines cross-country-correlated long-run risk with Epstein and Zin preferences, using U.S. and U.K. data, and show that it successfully reconciles international prices and quantities, thereby solving the international equity premium puzzle. These results provide evidence suggesting a link between common long-run growth perspectives and exchange rate movements.

DOI

10.1086/659238

Volume

119

Issue

1

Pages

153-181

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 ✓