Real Exchange Rate Mean Reversion and International Portfolio Allocation

2007 ◽  
Author(s):  
Marco Airaudo ◽  
Marcos Buscaglia
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Mean Reversion ◽  
Portfolio Allocation ◽  
International Portfolio

Generalized long memory and mean reversion of the real exchange rate

2010 ◽  
Vol 42 (11) ◽  
pp. 1377-1386
Author(s):  
Stefan C. Norrbin ◽  
Aaron D. Smallwood
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Long Memory ◽  
Mean Reversion ◽  
The Real

scholarly journals International Portfolio Allocation under Model Uncertainty

2012 ◽  
Vol 4 (1) ◽  
pp. 144-189 ◽  
Author(s):  
Pierpaolo Benigno ◽  
Salvatore Nisticò
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Model Misspecification ◽  
Home Bias ◽  
Exchange Rate Risk ◽  
Rate Risk ◽  
Long Run ◽  
International Portfolio ◽  
Short Run ◽  
Risk Free Rate

This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)

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