International Asset Pricing with Recursive Preferences

53 Pages Posted: 14 Mar 2012 Last revised: 10 Mar 2017

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2013

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 equilibrium regularities in a two-country and two-good economy with Epstein and Zin (1989) preferences, frictionless markets, and correlated long-run growth prospects.

Keywords: Recursive preferences, risk-sharing, exchange rate

JEL Classification: C62, F31, G12

Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano, International Asset Pricing with Recursive Preferences (January 18, 2013). Journal of Finance, 2013, AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2021328 or http://dx.doi.org/10.2139/ssrn.2021328

Riccardo Colacito

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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