Common Factors and Local Factors: Implications for Term Structures and Exchange Rates
研究多因子两国期限结构与汇率模型，发现国际债券组合的分散化收益要求随机贴现因子满足特定约束，局部因子是投资外国债券获利的必要条件，汇率风险溢价取决于债券收益因子的风险溢价差异，实证表明投资者对稀有冲击敏感，可解释远期溢价之谜。
Abstract This paper studies a multi-factor, two-country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected. It shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor-structured economy. Existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds. Further, the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns. Empirical results reveal the tendency for investors to respond sensitively to rare shocks, which is shown to be a potential solution to the forward premium puzzle.