Exchange Rates and Asset Prices in a Global Demand System
Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices; interpreting major economic events such as the European sovereign debt crisis; and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 percent on US equity.
Koijen acknowledges financial support from the Center for Research in Security Prices at the University of Chicago Booth School of Business. We thank Bernadette Palogme, Florencia Ferado, and Diego Rojas of MSCI for assistance on equity market data for countries in the MSCI ACWI Index. For comments and discussions, we thank Wenxin Du, Charles Engel, Pierre-Olivier Gourinchas, Oleg Itskhoki, and Helene Rey, Robert Richmond, and Simon Schmickler. We also thank seminar participants at FRB of Minneapolis, FRB of New York, MIT, NYU, Princeton University, University of Chicago, University of Illinois at Urbana-Champaign, UNC, the 2019 FRIC Conference on Financial Frictions, the 2019 SITE Conference on Financial Regulation, and the 2019 Wharton Conference on Liquidity and Financial Fragility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.