Exchange Rates, Equity Prices, and Capital Flows

Harald Hau and Helene Rey

The Review of Financial Studies, 2006, vol. 19, issue 1, 273-317

Abstract: We develop an equilibrium model in which exchange rates, stock prices, and capital flows are jointly determined under incomplete foreign exchange (forex) risk trading. Incomplete hedging of forex risk, documented for U.S. global mutual funds, induces the following price and capital flow dynamics: Higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation. Net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly, and quarterly frequencies for 17 OECD countries vis-à-vis the United States. Correlations are strongest after 1990 and for countries with higher equity market capitalization relative to GDP, suggesting that the observed exchange rate dynamics is indeed related to equity market development. Copyright 2006, Oxford University Press.

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (292)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhj008 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Exchange Rates, Equity Prices and Capital Flows (2003)
Working Paper: Exchange Rate, Equity Prices and Capital Flows (2002)
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: https://EconPapers.repec.org/RePEc:oup:rfinst:v:19:y:2006:i:1:p:273-317

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().