Risky Gravity

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We consider the canonical trade model with heterogeneous firms, love for variety
and trade costs, and integrate it in the consumption CAPM model. This yields a
structural gravity equation that includes an additional factor related to risk premia.
Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.
Original languageEnglish
JournalJournal of the European Economic Association
Publication statusAccepted/In press - 10 Aug 2023

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