How to determine exchange rates under risk neutrality: A note
The goal of this paper is to determine the exchange rates consistent with an equilibrium in the international assets and goods markets. We present a wealth model of a two-country economy where financial assets and goods are traded. We consider the case where the agents are risk neutral, a very commo...
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| Veröffentlicht in: | Economics letters 2017-08, Vol.157, p.92-96 |
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| container_end_page | 96 |
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| container_title | Economics letters |
| container_volume | 157 |
| creator | Bosi, Stefano Fontaine, Patrice Le Van, Cuong |
| description | The goal of this paper is to determine the exchange rates consistent with an equilibrium in the international assets and goods markets. We present a wealth model of a two-country economy where financial assets and goods are traded. We consider the case where the agents are risk neutral, a very common assumption in finance in order to have explicit solutions for prices, and, in particular, in international finance for exchange rates using the non-null Pareto optima. We show that the Pareto optima in the international assets and goods markets are found to coincide with the net trade allocations. More notably, under a no-arbitrage condition in the assets markets, we can define an exchange rates system for which PPP holds. We provide conditions to have a non-null Pareto optimum to compute the exchange rates. We give an example with a non-null Pareto optimum associated with the determination of the exchange rate. |
| doi_str_mv | 10.1016/j.econlet.2017.05.015 |
| format | Article |
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| fulltext | fulltext |
| identifier | ISSN: 0165-1765 |
| ispartof | Economics letters, 2017-08, Vol.157, p.92-96 |
| issn | 0165-1765 1873-7374 |
| language | eng |
| recordid | cdi_hal_primary_oai_HAL_hal_02877955v1 |
| source | ScienceDirect Journals (5 years ago - present) |
| subjects | Assets Economics and Finance Exchange rates Finance Foreign exchange rates Humanities and Social Sciences International asset pricing International finance Markets Neutrality No-arbitrage conditions Pareto optimum Prices Returns on securities Studies Wealth |
| title | How to determine exchange rates under risk neutrality: A note |
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