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This paper presents a portfolio model of financial intermediation in which currency choice is determined by hedging decisions on both sides of a bank’s balance sheet. Minimum variance portfolio (MVP) allocations are found to provide a natural benchmark to estimate the scope for dollarization...
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"compensate US investors for taking on more US consumption growth risk," yet these excess returns are all approximately … uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the … risk premia. …
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