rare_disasters_and_exchange_rates_june_2015
➤ Gửi thông báo lỗi ⚠️ Báo cáo tài liệu vi phạmNội dung chi tiết: rare_disasters_and_exchange_rates_june_2015
rare_disasters_and_exchange_rates_june_2015
RARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015e rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of world disasters as well as each country's exposure to these events is time-varying. This creates joint fluctuations in exchange rates, i rare_disasters_and_exchange_rates_june_2015nterest rates, options, and stock markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disrare_disasters_and_exchange_rates_june_2015
connect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and exchange rates. It also makes empiricaRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_201512. G15.’efarhi0fas.harvard.edu. xgabaLxSstern.nyu.edu. We are indebted to the editor and two referees for detailed and helpful suggestions. Mohsan Bilal. Igor Cesarec. Alex Chinco. Sam Fraiberger. Aaditya Iyer and Cheng Luo provided excellent research assistance. For helpful comments, we thank part rare_disasters_and_exchange_rates_june_2015icipants at various seminars and conferences, and Fernando Alvarez. Robert Barro. Nicolas Coeurdacier, Daniel Cohen. Mariano Croce. Alex Edmans. Francrare_disasters_and_exchange_rates_june_2015
ois Gourio. Stéphane Guibaud. Hanno Lustig. Matteo Maggiori. Anna Pavlova. Ken Rogoff. José Scheinkman. John Shea. Hyun Shin. Andreas Stathopoulos. AdRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015 rates, based on the hypothesis of Rietz (1988) and Barro (2006) that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The model accounts for a series of major puzzles in exchange rates. It also makes signature predictions about the link betw rare_disasters_and_exchange_rates_june_2015een exchange rates and currency options, which are broadly supported empirically. Overall, the model explains classic exchange rate puzzles and more nrare_disasters_and_exchange_rates_june_2015
ovel links between options, exchange rates and stock market movements.In the model, at any point in time, a world disaster might occur. Disasters corrRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015fer by their riskiness, that is by how much their exchange rate would depreciate if a world disaster were to occur (something that we endogenize in the paper, relating it to the productivity of the export sector). Because the exchange rate is an asset price whose future risk affects its current valu rare_disasters_and_exchange_rates_june_2015e, relatively riskier countries have more depreciated exchange rates.The probability of a world disaster as well as each country’s exposure to these erare_disasters_and_exchange_rates_june_2015
vents is time-varying. This creates large fluctuations in exchange rates, which rationalize their apparent "excess volatility". To the extent that perRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015isconnect" (Meese and Rogoff 1983).Relatively risky countries also feature high interest rates, because investors need to be compensated for the risk of an exchange rate depreciation in a potential world disaster. This allows the model to account for the forward premium puzzle. This is true both in rare_disasters_and_exchange_rates_june_2015samples with no disasters and in full samples with a representative number of disasters, but the intuition is easier to grasp in the case of samples wrare_disasters_and_exchange_rates_june_2015
ith no disasters.1 Indeed, suppose that a country is temporarily risky: it has high interest rates, and its exchange rate is depreciated. As its riskiRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015tion, the expected depreciation of a currency should be equal to the interest rate differential between that country and the reference region. A regression of exchange rate changes on interest rate differentials should yield a coefficient of 1. However, empirical studies starting with Tryon (1979). rare_disasters_and_exchange_rates_june_2015Hansen and Hodrick (1980). Fama (198-4). and those surveyed by Lewis (2011) consistently produce a regression coefficient that is less than 1. and oftrare_disasters_and_exchange_rates_june_2015
en negative. This invalidation of VIP has been termed the forward premium puzzle: currencies with high interest rates tend to appreciate. In other worRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015disaster occurring. In the paper, w also offer a detailed intuition in terms of time varying disaster risk premia for the case of full samples with a representative number of disasters.The disaster hypothesis also makes specific predictions about option prices. This paper works them out. and finds t rare_disasters_and_exchange_rates_june_2015hat those signature predictions are reasonably well borne out in the data. We view this as encouraging support for the disaster hypothesis.The startinrare_disasters_and_exchange_rates_june_2015
g point is that, in our theory, the exchange rate of a risk}' country commands high put premia in option markets as measured by high "risk reversals” RARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015 willing to pay a high premium to insure themselves against the risk that the exchange rate depreciates in the event of a world disaster. A country's risk reversal is therefore a reflection of its riskiness.Accordingly, the model makes four signature predictions regarding these put premia ("risk rev rare_disasters_and_exchange_rates_june_2015ersals"). First, investing in countries with high risk reversals should have high returns on average. Second, countries with high risk reversals shoulrare_disasters_and_exchange_rates_june_2015
d have high interest rates. Third, when the risk reversal of a country goes up. its currency contemporaneously depreciates. These predictions, and a fRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015 expressions for the major objects of interest, such as exchange rates, interest rates, carry trade returns, yield curves, forward premium puzzle coefficients, option prices, and stocks. To achieve this, we build on the closed economy model with a stochastic intensity of disasters proposed in Gabaix rare_disasters_and_exchange_rates_june_2015 (2012) (Rietz 1988 and Barro 2006 assume a constant intensity of disasters), and use the “linearity generating" processes developed in Gabaix (2009).rare_disasters_and_exchange_rates_june_2015
Our framework is also very flexible. We show that it is easy to extend the basic model to incorporate several factors and inflation.We calibrate a veRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015st rate, the forward premium, the return of the carry trade, as well as the size and volatility of risk reversals and their link with exchange rate movements and interest rates. The underlying disaster numbers largely rely on Barro and Ursua (2008)s empirical numbers which imply that rare disasters rare_disasters_and_exchange_rates_june_2015matter five times as much as they would if agents were risk neutral. As a result, changes in beliefs about disasters translate into meaningful volatilrare_disasters_and_exchange_rates_june_2015
ity. This is why the model yields sub3stantial volatility which is difficult to obtain with more traditional models (e.g. Obstfeld and Rogoff 1995).InRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015ween movements in the stock market and the currency of a country. However, the most risky currencies have a positive correlation with world stock market returns, while the least risky currencies have a negative correlation. Our calibration replicates these facts.Finally, recent research (Lustig. Rou rare_disasters_and_exchange_rates_june_2015ssanov and Verdelhan (2011)) has documented a one-factor structure of currency returns (they call this new factor HMLpx)- Our proposed calibration matrare_disasters_and_exchange_rates_june_2015
ches this pattern. In addition, our model delivers the new prediction that risk reversals of the most risky countries (respectively least risky) shoulRARE DISASTERS AND EXCHANGE RATES’*Emmanuel FarhiXavier GabaixHarvard. CEPR and XBER NYU, CEPR and NBER42242AbstractWe propose a new model of exchange rare_disasters_and_exchange_rates_june_2015atterns.Classic puzzles1.Excess volatility of exchange rates.2.Failure of uncovered interest rate parity. The coefficient in the Fama regression is less than 1. and sometimes negative.Link between options and exchange rates3.High interest rate countries have high put premia (as measured by “risk rev rare_disasters_and_exchange_rates_june_2015ersals”).4.Investing in countries with high (respectively low) risk reversals delivers high (respectively low) returns.5.When the risk reversal of a crare_disasters_and_exchange_rates_june_2015
ountry’s exchange rate increases (which indicates that the currency becomes riskier), the exchange rate contemporaneously depreciates.Link between stoGọi ngay
Chat zalo
Facebook