On the Asset Market View of Exchange Rates

Burnside, A. C. and Graveline, J. (2012) On the Asset Market View of Exchange Rates. NBER Working Paper Series, 18646. (doi: 10.3386/w18646)

Abstract

We offer a critique of the popular notion that the log-change of the real exchange rate equals the log-difference between the IMRSs of economically distinct agents in two economies. Contrary to existing claims, we show that this interpretation does not hold true in reduced-form SDF models that only rely on the absence of arbitrage in asset markets. In structural models, we show that this economic interpretation requires much stronger assumptions that emphasize the importance of goods markets rather than asset markets. We demonstrate the significance of our results for a broad range of topics in the international asset pricing literature.

• Item Type: Articles
• Status: Published
• Glasgow Author(s) Enlighten ID: Burnside, Professor Craig
• Authors: Burnside, A. C., and Graveline, J.
• Subjects: H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: NBER Working Paper Series
• Publisher: Review of Financial Studies
• Copyright Holders: Copyright © 2012 A. Craig Burnside and Jeremy J. Graveline
• First Published: First published in NBER Working Paper No. 18646
• Publisher Policy: Reproduced with the permission of the Author