Abstract
In periods of global stress there are large movements in exchange rates and assets prices. Currencies of developed economies appreciate, with the US dollar appreciating the most. Global stock markets fall, but the fall is smaller for the US market than other markets. Richer countries have riskier external balance sheets and thus their net foreign assets fall, but this effect is overturned by currency appreciations, resulting in a wealth transfer to richer countries. We build a general equilibrium model that helps us understand these facts. Specifically, we consider a model with time-varying risk appetites that produces asymmetric portfolios. Richer countries effectively have more appetite for risk, levering up their external portfolios by borrowing from poorer countries. As a result, their net foreign assets fall in periods of stress, yet there is a wealth transfer from poor to rich countries due to currency appreciations. The model delivers realistic currency risk premia and matches key asset pricing moments, while reproducing asset positions in stress and tranquil periods