Stock Markets and the Real Exchange Rate: An Intertemporal Approach
IMF Working Papers, May 1, 2003
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Bibliographic details
- Authors: Benoît Mercereau
- Published: May 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853230.001
Overview and model
- Presents an N-country model with stock markets and derives a closed-form solution for the real exchange rate.
- Risky asset prices and allocation of risky assets among countries are determined endogenously within the model.
- Framework permits analysis of how fundamental parameters affect the real exchange rate, including:
- the variance and covariance of the risky assets;
- demographic variables.
Key findings and predictions
- The model links stock-market outcomes and real exchange rate determination through endogenous asset pricing and international allocation of risky assets.
- Allows assessment of the sensitivity of the real exchange rate to:
- variance of risky assets;
- covariance of risky assets;
- demographic variables.
- Contrasts the model’s predictions with the Balassa-Samuelson effect.
Comparative analysis with the Balassa-Samuelson effect
- The paper explicitly contrasts the model’s predictions for the real exchange rate with those implied by the Balassa-Samuelson effect.
Transmission channels, policy-relevant mechanisms, and extensions
- Identifies a new transmission channel of the real exchange rate for parameters such as:
- income on net foreign assets;
- risk aversion;
- risk-hedging opportunities.
- Explores how risk-hedging opportunities and risk-aversion influence asset allocation and hence the real exchange rate.
Subjects and keywords
- Subjects: 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
Source: IMF Working Paper — Benoît Mercereau, "Stock Markets and the Real Exchange Rate: An Intertemporal Approach", Working Paper No. 2003/109, May 1, 2003.
Content in this bundle
- Stock Markets and the Real Exchange Rate: An Interemporal Approach - WP/03/109