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Volatility Risk Pass-through

Winner of the Best Paper Award at the 2018 International Finance Conference at BI Norwegian Business School Related image

We produce novel empirical evidence on the relevance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G-17 countries, we document that: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) consumption differentials vol and exchange rate vol are disconnected. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel and rich risk-sharing of vol shocks. (with M. Croce, Y. Liu, Ivan Shaliastovich) Latest update:

Coauthors: Croce, Liu, and Shaliastovich
Latest update: 11/2018.
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 Entropy_frontier_slides_coverRobust Exchange Rates and the International Entropy Frontier

We characterize an international trading scheme based on entropy risk-sharing. In our frictionless general equilibrium model, two international consumers with preferences for robustness trade both two consumption goods and a complete set of date- and state-contingent securities. Consumption home bias and concern for the temporal distribution of entropy generate rich endogenous dynamics for high moments of both international prices and quantities. (with Max Croce). Latest draft: 2/2015.

Coauthor: Croce
Latest update: 2/2015.
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Someone Likes it Skewed: an Experimental Analysis of Skewness and Risk Aversion

We modify the multiple price listing design of Holt and Laury (2002) to study the trade-off between expected payoff and payoff’s skewness. We find that our subjects are equally split between those that are and those that are not averse to negative skewness, despite the fact that they all display risk aversion in the standard Holt and Laury (2002) treatment. We estimate the parameters of a power-expo utility function only on the subset of subjects, whose behavior across treatments is consistent with this functional form and find that relative risk aversion can be twice as large as what is typically found in these experiments. (with Bassi and Fulghieri)

Coauthors: Bassi and Fulghieri
Latest update: 8/2014.
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Six Anomalies looking for a model.6puzzles_slides_cover

When agents have a preference for the timing of the resolution of uncertainty the presence of a low frequency component in the dynamics of consumption growth can account for a number of anomalies including the Backus and Smith puzzle and the high correlation of stock markets given the almost absence of correlation in the fundamentals. The introduction of stochastic volatility allows also to resolve the forward rate premium anomaly, providing a unified framework to study international finance puzzles. Latest draft: 1/2009.

Latest update: 1/2009.
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On the existence of the exchange rate when agents have complete home bias and non-time separable preferences

Colacito and Croce (2006) study the dynamics of the growth rate of the real exchange rate, when the preferences of the representative consumers in the two countries are defined only over the domestic good and characterized by non-time separability a la Epstein and Zin (1989). This paper shows that an equilibrium of this economy exists in which exchange rates are well defined and it can be interpreted as the limiting case of an economy in which preferences are defined over both domestic and foreign goods. This note was originated as a response to a number of people that questioned the existence of an exchange rate in the absence of trade.

Latest update: 1/2009.