International Factor Price Equalization in a limited-substitutability technology framework

This paper generalizes the Heckscher-Ohlin trade theory summarized in Samuelson's [Samuelson, P.A., 1949, International Factor Price Equalization Once Again, The Economic Journal 59, 181-197.] calculus treatment to the domain of non-differentiable technologies characterized by discrete alternative Leontief-Sraffa techniques. Demonstrated here is how the close qualitative parallelisms between limited-substitutability technologies and neoclassical marginal-productivity models permit the validity of the theorems of international factor price equalization and their well-known extensions even when smooth marginal productivities cannot obtain.Factor price equalization Limited-substitutability technology Discrete alternative techniques

Funding liquidity risk and the cross-section of stock returns

We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries’ funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies.Capital assets pricing model ; Intermediation (Finance) ; Stocks - Rate of return ; Assets (Accounting) ; Liquidity (Economics)

Risk appetite and exchange rates

We present evidence that the funding liquidity aggregates of U.S. …nancial intermediaries forecast exchange rate growth — at weekly, monthly, and quarterly horizons, both in-sample and out-of-sample, and for a large set of currencies. We estimate prices of risk using a cross-sectional asset pricing approach and show that U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. We provide a theoretical foundation for a funding liquidity channel in an intertemporal equilibrium pricing model where the “risk appetite”of dollar-funded intermediaries ‡uctuates with the tightness of their balance sheet constraints. Our empirical evidence shows that this channel is separate from the more familiar “carry trade”channel

Dash for Cash

We present broad-based evidence that the monthly payment cycle induces systematic patterns in liquid markets around the globe. First, we document temporary increases in the costs of debt and equity capital that coincide with key dates associated with month-end cash needs. Second, we present direct and indirect evidence on the role of institutions in the genesis of these patterns and derive estimates of the associated costs borne by market participants. Third, and finally, we investigate the limits to arbitrage that prevent markets from functioning efficiently. Our results indicate that many investors and their agents, including mutual funds, suffer from liquidity-related trading.Peer reviewe

Global liquidity and exchange rates

We present evidence that fluctuations in the aggregate balance sheets of financial intermediaries forecast exchange rate returns - at weekly, monthly, and quarterly frequencies, both in and out of sample, and for a large set of countries. We estimate prices of risk using a cross-sectional, arbitrage-free asset pricing approach and show that balance sheets forecast exchange rates because of the latter's association with fluctuations in risk premia. We provide a rationale for an intertemporal equilibrium pricing theory in which intermediaries are subject to balance sheet constraints.Intermediation (Finance) ; Asset pricing ; Foreign exchange rates ; International finance ; Financial institutions ; Investment banking

Financial amplification of foreign exchange risk premia

Theories of financial frictions in international capital markets suggest that financial intermediaries' balance sheet constraints amplify fundamental shocks. We present empirical evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals, and a component associated with financial intermediary balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to financial stability monitoring.Foreign exchange risk premium Financial stability monitoring Financial intermediaries Asset pricing