Asset Prices and Real Exchange Rates with Deep Habits
Year: 2014
Type: article
Abstract: I introduce an external habit for each consumption good, known as deep habits, into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries. I show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments. Calibrated to a set of ten countries, the model reproduces the cross-sectional evidence on currency risk premiums when sorting on interest rates, interest rate volatility, innovations to global exchange rate volatility, and value. Hence, the model provides an equilibrium interpretation of these empirical regularities.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhu043
Author: Christian Heyerdahl-Larsen
Institution: London Business School
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1966533561