• Exchange rates affect firms' profits and investment.

• A two-country model with incomplete markets that replicates equity risk premia in order to study equity and debt capital flows.

• Common, price-based factors describe exchange rate dynamics at intra-day frequencies as well as the quantity-based order flows.

• Capital inflows respond to both systematic and country-specific shocks to volatility, and they respond more in high uncertainty beta countries.

• Three factors (equity, dollar, and carry) describe the cross-section of equity returns from 46 developed and emerging countries from 1976 to the present.

• Sovereign optimal defaults and bond prices depend not only on the borrowers' economic conditions, but also on the lenders' time-varying risk aversion.

• After the fall of 2008, currency options prices exhibit a sharp increase in tail risk, similar to the emergence of the smirk in equity options after the 1987 crash. We estimate a simple structural model that includes both Gaussian and disaster risk.

Published Papers

• Currency and term risk premia cancel out.

• Market incompleteness cannot solve the FX volatility, cyclicality, and risk premium puzzles at the same time.

• Persistent and systematic arbitrage opportunities post-crisis in one of the largest asset markets; the causal impact of banking regulation.

• Two high-minus-low risk factors account for 18% to 80% of the monthly changes in bilateral exchange rates. SDFs must feature two global shocks.

• The average forward discount and U.S. industrial production growth rates forecast up to 25% of the dollar return variation at the one-year horizon.

• The consumption risk premium is only 2.2 percent. Most of wealth is human wealth. Events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth.

• A two-country real business cycle model generates a low correlation between relative consumption growth and exchange rates, a large forward premium, and "excess comovement" of asset prices relative to quantities.

• Value-maximizing managers face much higher risk-adjusted costs of capital in their investment decisions during recessions than expansions.

• A `slope' factor accounts for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. Carry trade investors load up on global volatility risk.

The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk: A Reply, with Hanno Lustig. American Economic Review, December 2011, Vol. 101, pp. 3477-3500 (pdf).

• The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption and market betas increase during recessions and times of crisis.

• Relative importance of macroeconomic news announcements versus variation in market liquidity in explaining the observed jumps in the U.S. Treasury market.

• The long-run risk model, which is successful at matching the wealth-consumption ratio, high equity risk premium and the nominal yields at short maturities implies too little (much) variation in the martingale component of the nominal (real) pricing kernel.

• The first fully rational explanation of the the uncovered interest rate parity / forward premium puzzle.
  
  

The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk, with Hanno Lustig. American Economic Review, March 2007, vol. 97, No 1, pp 89-117, pdf. Data

• We sort foreign currency returns into portfolios based on foreign interest rates, and we test the Euler equation of a domestic investor who invests in these currency portfolios.

Investing in Foreign Currency is like Betting on your Intertemporal Marginal Rate of Substitution, with Hanno Lustig. Journal of the European Economic Association, Papers and Proceedings, April-May 2006, Vol. 4, No. 2-3, pp 644-655, pdf.

• These bets are very risky if your neighbor's IMRS is not correlated with yours, but they provide a hedge when his IMRS is highly correlated and more volatile.