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on International Finance |
| By: | Adrian, Tobias; Stackman, Daniel; Vogt, Erik |
| Abstract: | We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the VIX. We show that countries' exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries' tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly. |
| Keywords: | Financial Stability; Fiscal policy; monetary policy; regulatory policy |
| JEL: | G01 G12 G17 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13435&r=all |
| By: | Mueller, Philippe; Stathopoulos, Andreas; Vedolin, Andrea |
| Abstract: | We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk. |
| Keywords: | correlation risk; exchange rate; international finance |
| JEL: | G32 F3 G3 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84140&r=all |