Reconnecting Exchange Rates with Gravitas

45 Pages Posted: 29 Jan 2021

See all articles by Ramin Hassan

Ramin Hassan

University of Minnesota, Finance

Erik Loualiche

University of Minnesota, Finance

Alexandre Reggi Pecora

University of Minnesota - Twin Cities - Department of Business Finance

Colin Ward

University of Minnesota - Carlson School of Management

Date Written: December 9, 2020

Abstract

We uncover a strong, temporal connection between trade and the exchange rate factor structure by instrumenting trade with trade deals. A typical agreement raises bilateral trade by 50 percent over five years which, in turn, reduces the systematic risk of the pair's exchange rate by a third of its standard deviation across countries. Our structurally estimated gravity model endogenizes the factor structure and shows that deals excel at pulling peripheral countries into the trade network's core, mitigating their currencies' systematic risk. Overall, our paper underscores that trade deals are not just about trade.

Keywords: exchange rates, common factor structure, trade network, trade agreements

JEL Classification: F11, F31, G15

Suggested Citation

Hassan, Ramin and Loualiche, Erik and Reggi Pecora, Alexandre and Ward, Colin, Reconnecting Exchange Rates with Gravitas (December 9, 2020). Available at SSRN: https://ssrn.com/abstract=3745935 or http://dx.doi.org/10.2139/ssrn.3745935

Ramin Hassan

University of Minnesota, Finance ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.ramin-h.com/

Erik Loualiche

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

Alexandre Reggi Pecora

University of Minnesota - Twin Cities - Department of Business Finance ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Colin Ward (Contact Author)

University of Minnesota - Carlson School of Management ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

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