Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change

49 Pages Posted: 16 Mar 2006 Last revised: 17 Mar 2009

See all articles by Harald Hau

Harald Hau

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

Massimo Massa

INSEAD - Finance

Joel Peress

INSEAD - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2008

Abstract

Traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability. Historically, this theory enjoyed little empirical support. We provide direct evidence by examining the exchange rate effect of a major redefinition of the MSCI global equity index in 2001 and 2002. The index redefinition implied large changes in the representation of different countries in the MSCI world index and therefore produced strong exogenous equity flows by index funds. Our event study reveals that countries with a relatively increasing equity representation experienced a relative currency appreciation upon announcement of the index change. Moreover, it shows that uninformative shocks can propagate from one asset class to another.

JEL Classification: F31, G14

Suggested Citation

Hau, Harald and Massa, Massimo and Peress, Joel, Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=891266 or http://dx.doi.org/10.2139/ssrn.891266

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Joel Peress (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 40 00 (Phone)
+33 1 60 72 40 45 (Fax)

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