On the asset market view of exchange rates

Burnside, A. C. and Graveline, J. J. (2019) On the asset market view of exchange rates. Review of Financial Studies, (doi:10.1093/rfs/hhz049) (Early Online Publication)

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If the asset market is complete, then the difference between foreign and domestic agents’ log intertemporal marginal rates of substitution (IMRSs) equals the log change in the real exchange rate. This equation is frequently used to argue that changes in real exchange rates reflect differences between agents’ required compensation for exposure to asset return uncertainty. We show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents’ IMRSs, not in differences. Instead, when this equation does offer insights, frictions in the goods market are the source of economic distinction between agents.

Item Type:Articles
Status:Early Online Publication
Glasgow Author(s) Enlighten ID:Burnside, Professor Craig
Authors: Burnside, A. C., and Graveline, J. J.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Review of Financial Studies
Publisher:Oxford University Press
ISSN (Online):1465-7368
Published Online:25 May 2019
Copyright Holders:Copyright © 2019 The Authors
First Published:First published in Review of Financial Studies 2019
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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