Trade Network Centrality and Currency Risk Premia

I uncover an economic source of exposure to global risk that drives international asset prices. Countries that are more central in the global trade network have lower interest rates and currency risk premia. To explain these findings, I present a general equilibrium model in which central countries&...

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Bibliographic Details
Published in:The Journal of finance (New York) 2019-06, Vol.74 (3), p.1315-1361
Main Author: RICHMOND, ROBERT J.
Format: Article
Language:English
Subjects:
Consumption
Currency
Economic models
Equilibrium
Interest rates
International finance
Money
Network centrality
Prices
Risk exposure
Risk premiums
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Summary:I uncover an economic source of exposure to global risk that drives international asset prices. Countries that are more central in the global trade network have lower interest rates and currency risk premia. To explain these findings, I present a general equilibrium model in which central countries' consumption growth is more exposed to global consumption growth shocks. This causes the currencies of central countries to appreciate in bad times, resulting in lower interest rates and currency risk premia. Empirically, central countries' consumption growth covaries more with world consumption growth, further validating the proposed mechanism.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12755