Article ID Journal Published Year Pages File Type
961528 Journal of Financial Markets 2016 27 Pages PDF
Abstract
We show that Hau and Rey׳s (2006) empirical evidence is not sufficient to support their risk-rebalancing theory as an explanation for the negative correlation between the stock market return differential and currency. A simple model combining home-wealth rebalancing and extrapolative expectations on the foreign stock predicts this negative correlation only when the host market is a source of international capital. Panel regressions indicate that the source status of the economy (i.e., whether it is a net receiver or source of international capital) is a main predictor of the stock return differential-currency correlation.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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