{
  "title": "New Shocks, Exchange Rates and Equity Prices",
  "publication": "IMF Working Papers, December 1, 2008",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480",
  "overlayPath": "/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/index.md",
  "summary": "We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy.",
  "sections": [
    {
      "heading": "Summary and main findings",
      "content": "- Study focus: exchange rate and equity price dynamics in general equilibrium with news shocks about future productivity and monetary policy.\n- Key identification: a condition under which asset prices become more volatile without affecting the volatility of the underlying processes — a positive correlation between news and current shocks.\n- Explanation: the same positive correlation condition explains why persistent underlying processes generate volatile asset prices.\n- Additional result: 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.\n- Empirical performance: the model matches second moments of exchange rate and equity returns for major floating currencies."
    },
    {
      "heading": "Model mechanisms and theoretical insights",
      "content": "- News shocks considered: information about future productivity and future monetary policy.\n- Essential condition for increased asset-price volatility: positive correlation between news shocks and contemporaneous (current) shocks.\n- Role of persistence: persistent underlying processes amplify asset-price volatility when combined with the identified correlation structure.\n- Determinants of exchange rate — equity return correlation:\n  - Currency denomination of the equity return.\n  - Monetary policy reaction to productivity shocks."
    },
    {
      "heading": "Empirical fit and scope",
      "content": "- The model is reported to do well at matching second moments of exchange rate and equity returns for major floating currencies.\n\n---\n\n Content in this bundle\n\n- wp08284\n  - wp08284 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp08284 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/bundle-manifest.json)",
    "Authors: Pietro Cova, Alessandro Rebucci, Akito Matsumoto, Massimiliano Pisani",
    "Published: December 1, 2008",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451871425.001",
    "Study focus: exchange rate and equity price dynamics in general equilibrium with news shocks about future productivity and monetary policy.",
    "Key identification: a condition under which asset prices become more volatile without affecting the volatility of the underlying processes — a positive correlation between news and current shocks.",
    "Explanation: the same positive correlation condition explains why persistent underlying processes generate volatile asset prices.",
    "Additional result: 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.",
    "Empirical performance: the model matches second moments of exchange rate and equity returns for major floating currencies.",
    "News shocks considered: information about future productivity and future monetary policy.",
    "Essential condition for increased asset-price volatility: positive correlation between news shocks and contemporaneous (current) shocks.",
    "Role of persistence: persistent underlying processes amplify asset-price volatility when combined with the identified correlation structure.",
    "Determinants of exchange rate — equity return correlation:",
    "The model is reported to do well at matching second moments of exchange rate and equity returns for major floating currencies.",
    "**_wp08284**"
  ],
  "related": [
    {
      "title": "_wp08284",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08284.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08284.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08284.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/index.md",
    "json": "/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/31/new-shocks-exchange-rates-and-equity-prices-22480/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T18:34:05.493Z"
}