Liquidity Risk and Time‐Varying Correlation between Equity and Currency Returns

22 Pages Posted: 14 May 2020

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

Using the data of 20 major Organization for Economic Co‐operation and Development countries over time, this article documents new evidence on real equity and real currency prices: higher real returns in the home equity market relative to its foreign counterparts are generally associated with real home currency depreciation at monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This article also argues that a long‐run risks‐type model with time‐varying liquidity risk in stock markets can provide one plausible explanation for the time‐varying correlation structure.

JEL Classification: E43, F31, G12, G15

Suggested Citation

Jung, Kuk Mo, Liquidity Risk and Time‐Varying Correlation between Equity and Currency Returns (April 2017). Economic Inquiry, Vol. 55, Issue 2, pp. 898-919, 2017, Available at SSRN: https://ssrn.com/abstract=3596372 or http://dx.doi.org/10.1111/ecin.12418

Kuk Mo Jung (Contact Author)

Henan University ( email )

85 Minglun St. Shunhe
Kaifeng, Henan 475001
China

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