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Topic
The Global Factor Structure of Exchange Rates
Resource type
Authors/contributors
- Korsaye, Sofonias Alemu (Author)
- Trojani, Fabio (Author)
- Vedolin, Andrea (Author)
Title
The Global Factor Structure of Exchange Rates
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.
Publication
Journal of Financial Economics
Volume
148
Issue
S0304405X23000156
Pages
21-46
Date
2023
Citation
Korsaye, S. A., Trojani, F., & Vedolin, A. (2023). The Global Factor Structure of Exchange Rates. Journal of Financial Economics, 148, 21–46.
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