New Shocks, Exchange Rates and Equity Prices

Author/Editor:

Pietro Cova ; Alessandro Rebucci ; Akito Matsumoto ; Massimiliano Pisani

Publication Date:

December 1, 2008

Electronic Access:

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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:

We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies.

Series:

Working Paper No. 08/284

Subject:

English

Publication Date:

December 1, 2008

ISBN/ISSN:

9781451871425/1018-5941

Stock No:

WPIEA2008284

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

36

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