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- Publisher Website: 10.1016/j.jfineco.2021.05.051
- Scopus: eid_2-s2.0-85107934114
- WOS: WOS:000687966200007
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Article: Entangled Risks in Incomplete FX Markets
Title | Entangled Risks in Incomplete FX Markets |
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Authors | |
Keywords | Exchange rates International finance puzzles Entangled risks Jump risks Incomplete markets |
Issue Date | 2021 |
Publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfec |
Citation | Journal of Financial Economics, 2021, v. 142 n. 1, p. 146-165 How to Cite? |
Abstract | We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance. |
Persistent Identifier | http://hdl.handle.net/10722/300235 |
ISSN | 2023 Impact Factor: 10.4 2023 SCImago Journal Rankings: 13.655 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Maurer, T | - |
dc.contributor.author | Tran, N | - |
dc.date.accessioned | 2021-06-04T08:40:04Z | - |
dc.date.available | 2021-06-04T08:40:04Z | - |
dc.date.issued | 2021 | - |
dc.identifier.citation | Journal of Financial Economics, 2021, v. 142 n. 1, p. 146-165 | - |
dc.identifier.issn | 0304-405X | - |
dc.identifier.uri | http://hdl.handle.net/10722/300235 | - |
dc.description.abstract | We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance. | - |
dc.language | eng | - |
dc.publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfec | - |
dc.relation.ispartof | Journal of Financial Economics | - |
dc.subject | Exchange rates | - |
dc.subject | International finance puzzles | - |
dc.subject | Entangled risks | - |
dc.subject | Jump risks | - |
dc.subject | Incomplete markets | - |
dc.title | Entangled Risks in Incomplete FX Markets | - |
dc.type | Article | - |
dc.identifier.email | Maurer, T: maurer@hku.hk | - |
dc.identifier.authority | Maurer, T=rp02560 | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.jfineco.2021.05.051 | - |
dc.identifier.scopus | eid_2-s2.0-85107934114 | - |
dc.identifier.hkuros | 322703 | - |
dc.identifier.volume | 142 | - |
dc.identifier.issue | 1 | - |
dc.identifier.spage | 146 | - |
dc.identifier.epage | 165 | - |
dc.identifier.isi | WOS:000687966200007 | - |
dc.publisher.place | Netherlands | - |