Model-Free International SDFs in Incomplete Markets ∗

We characterize model-free international stochastic discount factors (SDFs) under various degrees of market segmentation in incomplete markets. Our SDFs can be factorized into permanent and transitory components and they minimize the SDF dispersion subject to international pricing constraints. We find that large permanent SDF components are essential to jointly reconcile the low exchange rate volatility, the exchange rate cyclicality and the forward premium anomaly, however, at the cost of highly volatile SDFs. Market segmentation in stock and bond markets induces a deviation from the asset market view which helps avoid implausibly large SDF dispersions. Hence, economies featuring some form of mild market segmentation and large martingale components can match salient features of exchange rates, bond, equity, and FX option markets.