Exchange Rate Determination, Risk Sharing and the Asset Market View

A. Craig Burnside, Jeremy J. Graveline

NBER Working Paper No. 18646
Issued in December 2012
NBER Program(s):   AP   EFG   IFM

Recent research in international asset pricing has argued that changes in real exchange rates can be understood using only asset market data and an equation that relates changes in the exchange rate to differences between representative agents’ intertemporal marginal rates of substitution (IMRSs). We show that asset market data and this equation, alone, are not sufficient to understand how real exchange rates are determined, nor are they sufficient to economically interpret time-series variation in real exchange rates. Instead, we argue that it is necessary to make specific assumptions about preferences, goods market frictions, and asset markets. We also clarify the connection between agents’ IMRSs and reduced-form stochastic discount factors (SDFs) that are identified using only asset market data. We show that reduced-form models of two SDFs that satisfy this equation have exactly the same economic content as an arbitrage-free statistical model of exchange rate dynamics.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


This paper was revised on March 25, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18646

Users who downloaded this paper also downloaded these:
Burnside w17278 Carry Trades and Risk
Bassetto and Phelan w18864 Speculative Runs on Interest Rate Pegs
Burstein and Gopinath w18829 International Prices and Exchange Rates
Farmer, Nourry, and Venditti w18647 The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World
Mussa The Theory of Exchange Rate Determination
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us