New Shocks, Exchange Rates and Equity Prices

38 Pages Posted: 18 Dec 2008

See all articles by Akito Matsumoto

Akito Matsumoto

International Monetary Fund (IMF)

Pietro Cova

Bank of Italy

Massimiliano Pisani

Bank of Italy

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2008

Abstract

We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes - a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies.

Keywords: Working Paper

Suggested Citation

Matsumoto, Akito and Cova, Pietro and Pisani, Massimiliano and Rebucci, Alessandro, New Shocks, Exchange Rates and Equity Prices (December 2008). IMF Working Paper No. 08/284, Available at SSRN: https://ssrn.com/abstract=1316752

Akito Matsumoto (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Pietro Cova

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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