## 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

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### 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.*

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## Content in this bundle

- **Stock Markets and the Real Exchange Rate: An Interemporal Approach - WP/03/109**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/stock-markets-and-the-real-exchange-rate-an-intertemporal-approach-16522_