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International Asset Pricing with Recursive Preferences

Author

Listed:
  • Mariano Croce

    (University of North Carolina at Chapel H)

  • Riccardo Colacito

    (University of North Carolina, Chapel Hill)

Abstract
Focusing on US and UK, we document that both the Backus and Smith (1993) finding, concerning the low correlation between consumption differentials and exchange rates, and the forward-premium anomaly, concerning the tendency of high interest rate currencies to appreciate, have become more severe through time. After accounting for different capital mobility regimes, we show that these anomalies turn into general equilibriumregularities in a two-country and two-good economy with Epstein and Zin (1989) preferences, frictionless markets, and highly correlated long-run endowment growth prospects.

Suggested Citation

  • Mariano Croce & Riccardo Colacito, 2012. "International Asset Pricing with Recursive Preferences," 2012 Meeting Papers 984, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:984
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    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1998. "The Global Capital Market: Benefactor or Menace?," Department of Economics, Working Paper Series qt3kn3n2s8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    4. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    5. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
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