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Conferences

SESSION IV-1 : INTERNATIONAL FINANCE (18/12/2008 à 16h00)

Stock Market Comovements and Industrial Structure

Auteurs : DUTT Pushan (INSEAD); MIHOV Ilian (INSEAD and CEPR)

Intervenants : DUTT Pushan (INSEAD) pushan.dutt@insead.edu

We use monthly stock market indices for 58 countries to construct pairwise correlations of returns and to explain these correlations with differences in the industrial structure across these countries. We find that countries with similar industries have stock markets that exhibit high correlation of returns. The results are robust to the inclusion of other regressors like differences in income per capita, stock market capitalizations, measures of institutions, as well as various fixed time, country and country-pair effects. We also find that differences in the structure of exports explain stock market correlations quite well. Our results are consistent with an aggregate returns model in which the impact of each industry-specific shock is proportional to the share of this industry in the overall industrial output of the country. We also show that differences in production structures have higher explanatory power for segmented markets rather than for markets that are integrated.

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Long-Horizon Consumption Risk and the Cross-Section of Returns: New Tests and International Evidence

Auteurs : GRAMMIG Joachim (University of Tubingen); SCHRIMPF Andreas (CEER); SCHUPPLI Michael (University of Munster)

Intervenants : SCHUPPLI Michael (University of Munster) Michael.Schuppli@wiwi.uni-muenster.de

This paper investigates the explanatory power of the long-horizon Consumption CAPM (LH-CCAPM) to explain size and value premia in major international stock markets (US, UK and Germany). We modify the estimation approach by Parker and Julliard (2005) taking commonalities in size and book-to-market sorted portfolios into account. Our findings suggest that the long-horizon CCAPM typically delivers more plausible estimates (i.e. lower estimates of risk aversion) than the standard CCAPM. However, contrary to the results by Parker and Julliard, we find that the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. This result holds true for all stock markets considered.

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Welfare Implications of Exchange Rate Changes

Auteurs : MARQUES Luis (The Johns Hopkins University)

Intervenants : MARQUES Luis (The Johns Hopkins University) lmarque3@jhu.edu

This paper measures the welfare implications of a depreciation of the US dollar against the euro using a dynamic equilibrium model. I calibrate a simple two-country stochastic endowment economy with trade in goods and financial assets and exogenous variations in the exchange rate. The model displays both a trade channel effect and an asset channel effect after a change in the value of the exchange rate. The welfare loss coming from the trade channel translates into the relatively higher price that consumers have to pay for imports. The asset channel effect arises from three sources. One is the traditional valuation effect associated with US debt being denominated mostly in dollars. The other two novel effects are: (1) the dollar value of investors net worth, mostly denominated in local currency, increases more in Europe than in the US; (2) asset prices change, causing a portfolio rebalancing effect which results in a fall in the share of world assets owned by the US. I show that a dollar depreciation has potentially large negative welfare effects as measured by the net present value of future consumption. After a temporary 10% depreciation of the dollar, with a half-life of one year, I calculate a 0.25% decrease in lifetime aggregate consumption for the US consumer.

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Common Risk Factors in Currency Markets

Auteurs : LUSTIG Hanno (UCLA Anderson and NBER); ROUSSANOV Nick (Wharton); VERDELHAN Adrien (Boston University)

Intervenants : VERDELHAN Adrien (Boston University) av@bu.edu

We show that risk premia in currency markets are large and time-varying. Currency excess returns are highly predictable, more than stock returns, and about as much as bond returns. In addition, these predicted excess returns are strongly counter-cyclical. The average excess returns on low interest rate currencies are about 5 percent per annum smaller than those on high interest rate currencies after accounting for transaction costs. We show that a single return-based factor, the return on the highest minus the return on the lowest interest rate currency portfolios, explains the cross-sectional variation in average currency excess returns from low to high interest rate currencies. In a no-arbitrage model of exchange rates, we show that by building currency portfolio returns, we extract the common innovation to the stochastic discount factor in different countries. A reasonably calibrated version of our model can match the carry trade risk premium if low interest rates currencies are more exposed to this common innovation when the price of risk is high.

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