On the asset market view of exchange rates

Burnside, A. C. and Graveline, J. J. (2020) On the asset market view of exchange rates. Review of Financial Studies, 33(1), pp. 239-260. (doi: 10.1093/rfs/hhz049)

Abstract

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
• Additional Information: A correction has been published: The Review of Financial Studies, Volume 33, Issue 1, January 2020, Page 474, https://doi.org/10.1093/rfs/hhz065
• Status: Published
• Refereed: Yes
• 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: 0893-9454
• ISSN (Online): 1465-7368
• Published Online: 25 May 2019
• Copyright Holders: Copyright © 2019 The Authors
• First Published: First published in Review of Financial Studies 33:239-260
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher