The Global Factor Structure of Exchange Rates

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  • Fabio Trojani


  • European Finance Association Meeting

Date and Time

  • 08/21/2020


We provide a model-free framework to study the global factor structure of exchange rates. To this end, we propose a new methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international assets, such as stocks, bonds, and currencies, in the presence of frictions. We theoretically establish a two-factor representation for the cross-section of international SDFs, consisting of one global and one local factor, which is independent of the currency denomination. We show that our two-factor specification prices a large cross-section of international asset returns, not just in- but also out-of-sample with R2s of up to 80%.

  • Conferences: York Empirical Asset Pricing Workshop; NBER; IFM Meeting; SITE “Asset Pricing, Macro Finance and Computation”; World Congress of the Econometric Society; European Finance Association Meeting, 2020


  • Seminars: University of Geneva