International Asset Returns and Exchange Rates

摘要

We present a consumption-based international asset pricing model to study global equity premiums, the U.S. riskfree rate and the cross section of international asset returns. The model entails idiosyncratic, country-specific consumption risk, which helps explain the magnitude of global equity premiums. The model features country-specific habit formation, which helps explain the level of the interest rate on the U.S. short-term Treasury bills traded by domestic and international investors. The model takes into account real exchange rate uncertainty, which explain approximately twice as much the cross-sectional variation of the international stock and currency returns than other models under constant real exchange rates.