Farhi, Emmanuel; Gabaix, Xavier - C.E.P.R. Discussion Papers - 2015
We propose a new model of exchange rates, based on the hypothesis that the possibility of rare but extreme disasters is …'s exposure to these events is time-varying. This creates joint fluctuations in exchange rates, interest rates, options, and stock … markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disconnect …