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Global portfolio network and currency risk premia

Author

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  • de Boer, Jantke
Abstract
The position of countries in a network of external portfolio investments provides a novel macroeconomic characteristic to explain violations of uncovered interest rate parity. I derive a network centrality measure, where central countries are highly integrated with key suppliers of tradeable financial assets. Currency risk premia decrease as network centrality increases. Asset pricing tests confirm that the centrality risk factor is priced in the cross-section. Further, negative global shocks appreciate central countries' currencies and depreciate peripheral ones. In a consumption-based capital asset pricing model, central countries experience lower consumption growth in high marginal utility states, leading to currency appreciation.

Suggested Citation

  • de Boer, Jantke, 2024. "Global portfolio network and currency risk premia," Ruhr Economic Papers 1133, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:312406
    DOI: 10.4419/96973315
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    More about this item

    Keywords

    Exchange rates; currency risk premia; external portfolios; financial network; asset pricing;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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