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International Asset Pricing with Recursive Preferences
Author(s) -
COLACITO RICCARDO,
CROCE MARIANO M.
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12088
Subject(s) - economics , consumption (sociology) , anomaly (physics) , asset (computer security) , capital asset pricing model , financial economics , exchange rate , capital (architecture) , capital flows , monetary economics , econometrics , microeconomics , geography , computer security , computer science , profit (economics) , social science , physics , archaeology , sociology , condensed matter physics
Focusing on data from the United States and the United Kingdom, we document that both the anomaly identified by Backus and Smith, which concerns the low correlation between consumption differentials and exchange rates, and the forward premium anomaly, which concerns the tendency of high interest rate currencies to appreciate, have become more severe over time. Taking into account different capital mobility regimes, we show that these anomalies turn into general equilibrium regularities in a two‐country and two‐good economy with Epstein and Zin preferences, frictionless markets, and correlated long‐run growth prospects.