Real financial market exchange rate volatility and portfolio flows
Valentyna Ozimkovska ()
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Valentyna Ozimkovska: University of Kiel
International Economics and Economic Policy, 2018, vol. 15, issue 2, No 3, 303 pages
Abstract This paper studies the relationship between real financial market exchange rate volatility and US cross-border equity flows. We found strong evidence that causality goes from real financial market exchange rate volatility to equity flows. According to our results, real financial market exchange rate volatility negatively influences purchases of foreign equity. This finding is in line with the portfolio optimization theory. The impact of real financial market exchange rate volatility on sales of foreign equity is also negative. This result can be explained by the theory of behavioral finance which states that investors are reluctant to realize losses of their portfolios. This is why investors decrease sales of assets when riskiness of the assets increases. The impact of real financial market exchange rate on net purchases of foreign equity is positive. It follows from these results that sales of foreign equity decrease more strongly than purchases of foreign equity when riskiness of foreign assets increases.
Keywords: Real financial market exchange rate; Volatility; Portfolio flows (search for similar items in EconPapers)
JEL-codes: C33 E52 E58 F42 (search for similar items in EconPapers)
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