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Exchange Rates, Stock Prices, and Stock Market Uncertainty

Fatemeh Salimi
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Fatemeh Salimi: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: While the reference framework for international portfolio choice emphasizes a mean-variance framework, uncovered parity conditions only involve mean stock or bond returns. We propose to augment the empirical specification by using the relative stock market uncertainty of two countries as an extra determinant of their bilateral exchange rate returns. A rise in the relative uncertainty of one stock market will lead capital to flow to the other stock market and generate an appreciation in the currency of the latter. By focusing on the JPY/USD exchange rate returns during the most recent decade (2009-2019) and relying on a nonlinear framework, we provide evidence that the Japanese-US differential stock market uncertainty affects the JPY/USD returns both contemporaneously and with weekly lags. This finding is robust when we control for the stock returns differential and the differential changes in Japanese and US unconventional monetary policy measures.

Keywords: exchange rate determination; implied volatility; UEP; flight to safety; flight to quality (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-fmk and nep-mon
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03007904
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