The global factor structure of exchange rates

AutorF. Trojani, S. A. Korsaye, A. Vedolin
JournalJournal of Financial Economics
Datum3. Apr. 2023
KategorieAcademic Publications
Volume148(1)
Seitenzahlen64–82

We propose a model-free methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international stocks, bonds, and currencies in markets with frictions. We theoretically establish a SDF decomposition into one global factor and a currency basket. We show that our global factor prices a large cross-section of international asset returns, not just in- but also out-of-sample, across different currency denominations. Moreover, the pricing ability of the global factor is largely independent of the market structure or the size and type of market friction.