Premium
Excess Returns, Average Returns and the Adjustment Mechanism of the External Position of a Country
Author(s) -
Civelli Andrea
Publication year - 2016
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12211
Subject(s) - economics , econometrics , valuation (finance) , position (finance) , valuation effects , offset (computer science) , excess return , finance , paleontology , context (archaeology) , computer science , biology , programming language
I provide a new decomposition of the external constraint of a country in which, in addition to the trade and valuation channel, adjustments in the stochastic discount factor and the spread between average international returns and risk‐free rate can offset a current debt position. The importance of these channels is empirically assessed using US data. A primary contribution of the discount factor and secondary effects of excess and average returns are found in the non‐detrended analysis, confirming the theoretical characterization of the valuation effects in previous literature. By using detrended data instead, the role of excess returns would be spuriously overestimated.