Entangled risks in incomplete FX markets

• 成果类型: Article
• 署名作者: Maurer, Thomas; Tran, Ngoc-Khanh
• 署名单位: University of Hong Kong; Virginia Polytechnic Institute & State University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2021.05.051
• 发表日期: 2021
• 页码: 146-165
• 关键词: Exchange rates; International finance puzzles; Entangled risks; Jump risks; incomplete markets

摘要

We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance. (c) 2021 Elsevier B.V. All rights reserved.