Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination

Daniel Nathan and Nadav Ben Zeev

MPRA Paper from University Library of Munich, Germany

Abstract: The equity hedging channel predicts that institutional investors’ (IIs’) hedging of their foreign equity position’s FX exposure via foreign currency forward contracts leads to a positive relation between this position and IIs’ supply of foreign currency forwards; in equilibrium, this prediction implies a negative relation between foreign equity prices and forward and spot rates. We use novel daily data on Israeli IIs’ FX forward flows to test this equity hedging channel within a suitable Bayesian local projection model, finding strong evidence supporting a meaningful such channel.

Keywords: Equity Hedging Channel; Foreign Currency Forward Flows; Forward Exchange Rate; Spot Exchange Rate; Global Stock Prices; Institutional Investors; Bayesian Local Projections. (search for similar items in EconPapers)
JEL-codes: E44 F3 F31 G15 G23 (search for similar items in EconPapers)
Date: 2022-04-11
New Economics Papers: this item is included in nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/115194/1/MPRA_paper_112909.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/115194/9/MPRA_paper_115194.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/115194/15/MPRA_paper_115194.pdf revised version (application/pdf)

Related works:
Working Paper: Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination (2023)
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