Volatility, intermediaries, and exchange rates

• 成果类型: Article
• 署名作者: Fang, Xiang; Liu, Yang
• 署名单位: University of Hong Kong
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2020.05.010
• 发表日期: 2021
• 页码: 217-233
• 关键词: volatility; Financial intermediaries; Exchange rates; Currency returns; Value at risk

摘要

We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus-Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data. (c) 2021 Elsevier B.V. All rights reserved.