Anmerkungen:
In: Journal of Financial Economics (JFE), Forthcoming
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 10, 2020 erstellt
Beschreibung:
We propose and estimate a quantitative model of exchange rates in which the participantsin the FX market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatilitytranslates into tighter VaR constraints, and intermediaries require higher returns to holdforeign assets. Therefore, foreign currency is expected to appreciate. The model quantitativelyresolves the Backus-Smith puzzle, the forward premium puzzle, the exchange rate volatilitypuzzle, and explains deviations from the covered interest rate parity. Moreover, the modelimplies a contemporaneous correlation and a predictive relation between proxies of leverageconstraint tightness and exchange rates. These implications are supported in the data