Stock Markets and the Real Exchange Rate: An Intertemporal Approach

May 1, 2003

Preview Citation

Format: Chicago

Benoît Mercereau. Stock Markets and the Real Exchange Rate: An Intertemporal Approach, (USA: International Monetary Fund, 2003) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset prices, Exchange rates, Financial markets, Foreign exchange, Prices, Production, Productivity, Real exchange rates, Stock markets

Keywords: Asset prices, Balassa-Samuelson effect, Exchange rate volatility, Exchange rates, Market valuation, Present discounted value, Productivity, Real exchange rate, Real exchange rates, Risk-hedging benefit, Risk-hedging opportunity, Risky assets, Stock markets, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/109
Stock No:

WPIEA1092003
ISBN:

9781451853230
ISSN:

1018-5941

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