TY  - JOUR
AU  - Hau,Harald
AU  - Rey,Helene
TI  - Exchange Rate, Equity Prices and Capital Flows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9398
PY  - 2002
Y2  - December 2002
UR  - http://www.nber.org/papers/w9398
L1  - http://www.nber.org/papers/w9398.pdf
N1  - Author contact info:
Harald Hau
University of Geneva and GFRI
Unipignon
40, Boulevard du Pont d'Arve
CH 1211 Geneva 4
Switzerland
E-Mail: prof@haraldhau.com

Helene Rey
London Business School
Regents Park
London NW1 4SA
UNITED KINGDOM
Tel: 44 2070008412
E-Mail: hrey@london.edu
AB  - We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for U.S. global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) 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-…-vis the U.S. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics is indeed related to equity market development.
ER  -