We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus–Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data.
Publications
1Jul
1 Jul 2021
Journal of Financial Economics
14Feb
方博士是一位研究汇率和国际金融的学者。方博士为人随和,他相信,面对生活丶教学,以及研究中的起落,都应努力处之泰然。
14 Feb 2020
Journal of Financial Economics