Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination

Nathan, Daniel and Ben Zeev, Nadav (2022): Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination.

Abstract

The equity hedging channel predicts that institutional investors’ (IIs’) hedging of their foreign equity position’s FX exposure via foreign currency forward contracts leads to a positive relation between this position and IIs’ supply of foreign currency forwards; in equilibrium, this prediction implies a negative relation between foreign equity prices and forward and spot rates. We use novel daily data on Israeli IIs’ FX forward flows to test this equity hedging channel within a suitable Bayesian local projection model, finding strong evidence supporting a meaningful such channel.

• Item Type: MPRA Paper
• Language: English
• Keywords: Equity Hedging Channel; Foreign Currency Forward Flows; Forward Exchange Rate; Spot Exchange Rate; Global Stock Prices; Institutional Investors; Bayesian Local Projections.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

References

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