Stock Markets and the Real Exchange Rate: An Intertemporal Approach

Benoît Mercereau

No 2003/109, IMF Working Papers from International Monetary Fund

Abstract: The paper presents an N-country model with stock markets, in which a closed-form solution for the real exchange rate is derived. Risky asset prices and allocation of risky assets among countries are determined endogenously. Such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. The predictions of the model are contrasted with the Balassa-Samuelson effect. A new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk aversion, and risk-hedging opportunities is also explored.

Keywords: WP; Real exchange rate; stock markets; risky assets; Balassa-Samuelson effect; exchange rate volatility; risk-hedging opportunity; present discounted value; market valuation; risk-hedging benefit; Real exchange rates; Exchange rates; Asset prices; Productivity (search for similar items in EconPapers)
Pages: 35
Date: 2003-05-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2003/109

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