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Structural Relationships between Equity Flows, Stock Prices and Exchange Rate (in Korean)

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  • Cheonggu Cho

    (School of International Economics and Business, College of Business and Economics, Yeungnam University)

Abstract

According to the portfolio rebalancing model of Hau and Rey (2004; 2006), portfolio equity flows of international investors are one of key variables which determine the relationship between stock prices and exchange rate. Equity flows not only directly affect both stock prices and exchange rate, but also serve as a transmission channel of shocks between the two variables. This paper analyzes the structural relationships between Korea-US equity flows, Korea stock prices, USD/KRW exchange rate and US stock prices over the period from January 2000 to December 2016, using the structural VAR model. We employ the identification method through heteroscedasticity to allow for contemporaneous bidirectional causalities between the variables included in the model. Based on the impulse response analysis, we find that Korea-US equity flows, Korea stock prices and USD/KRW exchange rate have significant contemporaneous and/or lagged effects on each other and generally have the strongest effects in the month when shocks occur. As a whole, the signs of estimated impulse responses, except for the accumulated response of Korea stock prices to a shock in USD/KRW exchange rate, show the patterns consistent with the predictions of the portfolio rebalancing model during the sample period.

Suggested Citation

  • Cheonggu Cho, 2018. "Structural Relationships between Equity Flows, Stock Prices and Exchange Rate (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 24(2), pages 89-129, June.
    • Handle: RePEc:bok:journl:v:24:y:2018:i:2:p:89-129
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    More about this item

    Keywords

    Portfolio rebalancing; Equity flows; Stock prices; Exchange rates; Identification through heteroscedasticity;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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