Flight-to-quality and correlation between currency and stock returns

Jin-Wan Cho, Joung Hwa Choi, Taeyong Kim and Woojin Kim ()

Journal of Banking & Finance, 2016, vol. 62, issue C, 191-212

Abstract: We document that capital flows in and out of emerging or developed markets are sensitive to global equity market conditions. Capital tends to move out of emerging into developed countries in global down markets, leading to depreciation (appreciation) of emerging (developed) currencies. This generates a positive (negative) correlation between currency and equity in emerging (developed) markets which is amplified by the magnitude of the capital movement. We also verify that hedging currency risks may undo the natural hedge and increase the total return volatility under negative correlation.

Keywords: Flight-to-quality; Capital flows; Correlation between currency and stock returns; Currency hedging (search for similar items in EconPapers)
JEL-codes: G10 G11 G15 G23 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:62:y:2016:i:c:p:191-212

DOI: 10.1016/j.jbankfin.2014.09.003

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