Asset prices and real exchange rates with deep habits

Heyerdahl-Larsen, C (2014) Asset prices and real exchange rates with deep habits. Review of Financial Studies, 27 (11). pp. 3280-3317. ISSN 0893-9454


I introduce an external habit for each consumption good, known as deep habits, into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries. I show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments. Calibrated to a set of ten countries, the model reproduces the cross-sectional evidence on currency risk premiums when sorting on interest rates, interest rate volatility, innovations to global exchange rate volatility, and value. Hence, the model provides an equilibrium interpretation of these empirical regularities.

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Item Type: Article
Subject Areas: Finance
Date Deposited: 02 Mar 2016 18:51
Last Modified: 24 Jul 2024 01:31

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