Implications of Incomplete Markets for International Economies

Bakshi, G; Cerrato, M; Crosby, J

Implications of Incomplete Markets for International Economies

Bakshi, G Cerrato, M Crosby, J

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Publisher:: Oxford University Press (OUP)
Publication Type:: Journal Article
Citation:: The Review of Financial Studies, 2018, 31 (10), pp. 4017 - 4062
Issue Date:: 2018

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Field	Value	Language
dc.contributor.author	Bakshi, G	en_US
dc.contributor.author	Cerrato, M	en_US
dc.contributor.author	Crosby, J https://orcid.org/0000-0003-4179-9464	en_US
dc.date.issued	2018	en_US
dc.identifier.citation	The Review of Financial Studies, 2018, 31 (10), pp. 4017 - 4062	en_US
dc.identifier.issn	1465-7368	en_US
dc.identifier.uri	http://hdl.handle.net/10453/130314
dc.description.abstract	We develop a restriction that precludes implausibly high reward-for-risk in incomplete international economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors (SDFs) subject to correct pricing. The problem is analytically solvable and synthesizes domestic and foreign SDFs into spanned and unspanned components. Our novelty is that exchange rate growth need not equal the ratio of SDFs and that the SDF correlations are plausibly lowered. Exploiting the realities of cross-country correlations of macroeconomic quantities, namely, consumption, wealth, dividend growths, and asset returns, our empirical investigation refutes the specification of complete markets.	en_US
dc.publisher	Oxford University Press (OUP)	en_US
dc.relation.ispartof	The Review of Financial Studies	en_US
dc.relation.isbasedon	10.1093/rfs/hhx120	en_US
dc.subject.classification	Finance	en_US
dc.title	Implications of Incomplete Markets for International Economies	en_US
dc.type	Journal Article
utslib.citation.volume	10	en_US
utslib.citation.volume	31	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.issue	10	en_US
pubs.publication-status	Published	en_US
pubs.volume	31	en_US

Abstract:

We develop a restriction that precludes implausibly high reward-for-risk in incomplete international economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors (SDFs) subject to correct pricing. The problem is analytically solvable and synthesizes domestic and foreign SDFs into spanned and unspanned components. Our novelty is that exchange rate growth need not equal the ratio of SDFs and that the SDF correlations are plausibly lowered. Exploiting the realities of cross-country correlations of macroeconomic quantities, namely, consumption, wealth, dividend growths, and asset returns, our empirical investigation refutes the specification of complete markets.

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http://hdl.handle.net/10453/130314