Revisiting the Real Exchange Rate Parity: The Role of Stock Market Information
University of Turku - Department of Economics
Jyväskylä University School of Business and Economics; University of Oulu - Department of Economics
August 5, 2010
In this paper we propose to augment the traditional relationship between real exchange rates and real interest rates (RERI) by adding the stock market equilibrium condition to it. We introduce the relative dividend yield as the new information variable. In the empirical analysis we use recent monthly observations from the U.K., Japan, Canada and Eurozone, all relative to the U.S. We show that the introduction of stock market information is highly relevant for the functioning of the RERI hypothesis. Based on the results from the cointegration analysis the role of relative stock market performance is especially important in the short-term (3 month) horizon, where the augmented RERI representation is most strongly supported.
Number of Pages in PDF File: 30
Keywords: real exchange rate, real interest rates, stock markets, cointegration
JEL Classification: E44, F21, F31, F41working papers series
Date posted: August 7, 2010
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