Asset Prices and Exchange Rates
51 Pages Posted: 14 Jul 2003 Last revised: 16 Nov 2022
There are 4 versions of this paper
Asset Prices and Exchange Rates
Asset Prices and Exchange Rates
Asset Prices and Exchange Rates
Asset Prices and Exchange Rates
Date Written: July 2003
Abstract
This paper develops a simple two-country, two-good model, in which the real exchange rate, stock and bond prices are jointly determined. The model predicts that stock market prices are correlated internationally even though their dividend processes are independent, providing a theoretical argument in favor of financial contagion. The foreign exchange market serves as a propagation channel from one stock market to the other. The model identifies interconnections between stock, bond and foreign exchange markets and characterizes their joint dynamics as a three-factor model. Contemporaneous responses of each market to changes in the factors are shown to have unambiguous signs. These implications enjoy strong empirical support. Estimation of various versions of the model reveals that most of the signs predicted by the model indeed obtain in the data, and the point estimates are in line with the implications of our theory. Furthermore, the uncovered interest rate parity relationship has a risk premium in our model, shown to be volatile. We also derive agents? portfolio holdings and identify economic environments under which they exhibit a home bias, and demonstrate that an international CAPM obtaining in our model has two additional factors.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market
-
Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Markets
-
What Explains the Stock Market's Reaction to Federal Reserve Policy?
-
What Explains the Stock Market's Reaction to Federal Reserve Policy?
-
The Effect of Changes in the Federal Funds Rate Target on Market Interest Rates in the 1970s
By Timothy Cook and Thomas K. Hahn
-
The Impact of Monetary Policy on Asset Prices
By Brian P. Sack and Roberto Rigobon
-
The Impact of Monetary Policy on Asset Prices
By Brian P. Sack and Roberto Rigobon
-
Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...
-
Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...
-
Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...