Abstract

http://ssrn.com/abstract=383702
 
 

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Citations (73)



 


 



Exchange Rate, Equity Prices and Capital Flows


Harald Hau


University of Geneva - Geneva Finance Research Institute; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Helene Rey


London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

February 2003

CEPR Discussion Paper No. 3735

Abstract:     
We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics is indeed related to equity market development.

Number of Pages in PDF File: 49

Keywords: Capital flows, equity flows, market incompleteness, forex hedging

JEL Classification: F30, F31, G10, G15

working papers series





Date posted: February 27, 2003  

Suggested Citation

Hau, Harald and Rey, Helene, Exchange Rate, Equity Prices and Capital Flows (February 2003). CEPR Discussion Paper No. 3735. Available at SSRN: http://ssrn.com/abstract=383702

Contact Information

Harald Hau
University of Geneva - Geneva Finance Research Institute ( email )
40, Boulevard du Pont d'Arve
CH 1211 Geneva 4
Geneva
Switzerland
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Helene Rey (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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