Vargas, Gregorio A. (2008): What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns?
This is the latest version of this item.
Download (141kB) | Preview
This paper establishes the link of microstructure and macroeconomic factors with the time-varying conditional correlation of foreign exchange and excess equity returns. By using the proposed DCC model with exogenous variables, capital flows and interest rate differentials are shown to be significant determinants of this correlation which is inclusive of the short-run variation of both asset returns. The results also provide evidence of the dynamic behavior of global investors as they seek parity in equity returns between home and foreign markets to reduce exchange rate risks.
|Item Type:||MPRA Paper|
|Original Title:||What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns?|
|Keywords:||uncovered equity parity, order flow, ADCCX|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Gregorio A. Vargas|
|Date Deposited:||02. Apr 2008 13:22|
|Last Modified:||05. Jul 2015 17:38|
Billio M, Caporin M, Gobbo M. 2006. Flexible Dynamic Conditional Correlation Multivariate GARCH Models for Asset Allocation. Applied Financial Economics Letters. 2: 123-130.
Brooks R, Edison H, Kumar M, Sløk T. 2001. Exchange Rates and Capital Flows. IMF Working Paper WP/01/190, December.
Cappiello L, Engle R, Sheppard K. 2006. Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns. Journal of Financial Econometrics 4: 537-572.
Engle R. 2002. Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business and Economic Statistics 20: 339-350.
Engle R, Sheppard K. 2001. Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH. NBER Working Paper 8554, October.
Evans M, Lyons R. 2002a. Order Flow and Exchange Rate Dynamics. Journal of Political Economy 110: 170-180.
Evans M, Lyons R. 2002b. Informational Integration and FX Trading. Journal of International Money and Finance. 21: 807-831.
Evans M, Lyons R. 2006. Understanding Order Flow,” International Journal of Finance and Economics 11: 3-23.
Feng Y. 2006. A Local Dynamic Conditional Correlation Model. Typescript, Heriot-Watt University, available at http://www.ma.hw.ac.uk/~yuanhua/papers/LDCC.pdf.
Froot K, Ramadorai T. 2005. Currency Returns, Intrinsic Value, and Institutional-Investor Flows. Journal of Finance 60: 1535-1566.
Glosten L, Milgrom P. 1985. Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Agents. Journal of Financial Economics 14: 71-100.
Hafner C, Franses P. 2003. A Generalized Dynamic Conditional Correlation Model for Many Asset Returns. Typescript, Erasmus University Rotterdam, available at http://www2.eur.nl/WebDOC/doc/econometrie/feweco20030708113101.pdf.
Hau H, Rey H. 2004. Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates? American Economic Review 94: 126-133.
Hau H, Rey H. 2006. Exchange Rates, Equity Prices, and Capital Flows. Review of Financial Studies. 19: 273-317.
Kuper G, Lestano. 2007. Dynamic Conditional Correlation Analysis of Financial Market Interdependence: An Application to Thailand and Indonesia. Journal of Asian Economics 18: 670-684.
Kyle A. 1985. Continuous Auctions and Insider Trading. Econometrica 53: 1315-1335.
Lanza A, Manera M, McAleer M. 2006. Modeling Dynamic Conditional Correlations in WTI Oil Forward and Future Returns. Finance Research Letters 3: 114-132.
Levich R, Hayt G, Ripston B. 1999. 1998 Survey of Derivative and Risk Management Practices by U.S. Institutional Investors. Survey conducted by the NYU Salomon Center, CIBC World Markets, and KPMG, available at http://pages.stern.nyu.edu/~rlevich/ wp/report-final.pdf.
Manera M, McAleer M, Grasso M. 2006. Modelling Time-Varying Conditional Correlations in the Volatility of Tapis Oil Spot and Forward Returns. Applied Financial Economics, 16: 525-533.
Meese R, Rogoff K. 1983a. Empirical Exchange Rate Models of the Seventies. Journal of International Economics 14: 3-24.
Meese R, Rogoff K. 1983b. The Out-of-Sample Failure of Empirical Exchange Rate Models, in J Frenkel (ed.) Exchange Rate and International Macroeconomics. University of Chicago Press: Chicago.
Obstfeld M, Rogoff K. 2000. The Six Major Puzzles in International Macroeconomics: Is there a Common Cause? in B Bernanke and K Rogoff (eds.) NBER Macroeconomics Annual. Cambridge MA.
Rogoff K. 2001. The Failure of Empirical Exchange Rate Models: No Longer New, but Still True. Economic Policy Web Essay, October.
Available Versions of this Item
What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns? (deposited 15. Feb 2008 19:19)
- What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns? (deposited 02. Apr 2008 13:22) [Currently Displayed]