New Shocks, Exchange Rates and EquityPrices

Akito Matsumoto, Pietro Cova, Massimiliano Pisani and Alessandro Rebucci ()

No 08/284, IMF Working Papers from International Monetary Fund

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: External shocks; Exchange rates; Stock prices; Productivity; Monetary policy; Asset prices; Floating exchange rates; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mon and nep-opm
Date: 2008-12-10
View list of references

Downloads: (external link)
http://www.imf.org/external/pubs/ft/wp/2008/wp08284.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:imf:imfwpa:08/284

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund
Address: International Monetary Fund, Washington, DC USA
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().