What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns?

Gregorio Vargas

MPRA Paper from University Library of Munich, Germany

Abstract: This paper establishes the link of microstructure and macroeconomic factors to the time-varying conditional correlation of foreign exchange and excess equity returns. By using the proposed DCC model with exogenous variables, capital flows and interest rate differentials are shown to be significant factors in driving this conditional correlation. Furthermore, using this model it provides evidence of the dynamic behavior of global investors as they seek parity in equity returns between home and foreign markets to reduce exchange rate risks.

Keywords: uncovered equity parity; order flow; ADCCX (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://mpra.ub.uni-muenchen.de/8027/1/MPRA_paper_8027.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7174

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