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Export pricing and the cross-country correlation of stock prices

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  • Tervala, Juha

    ()
    (University of Turku)

Abstract

This study analyses cross-country correlations of stock prices (values of firms) using the basic New Open Economy Macroeconomics model. We show that cross-country correlations of stock prices greatly depend on the currency of export pricing in the case of monetary shocks but not notably for temporary technology shocks. In the case of a money supply shock, the producer (local) currency pricing version of the model generates a negative (positive) cross-country correlation of stock prices.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0928netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 28/2009.

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Length: 31 pages
Date of creation: 02 Nov 2009
Date of revision:
Publication status: Published as Tervala, Juha, 'Export pricing and the cross-country correlation of stock prices' in Review of Financial Economics, 2011, pages 74-83.
Handle: RePEc:hhs:bofrdp:2009_028

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: stock prices; international business cycles; open economy;

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References

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  1. Charles Engel, 1999. "Local-Currency Pricing and the Choice of Exchange-Rate Regime," Discussion Papers in Economics at the University of Washington 0036, Department of Economics at the University of Washington.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Tervala, Juha, 2007. "The international transmission of monetary policy in a dollar pricing model," Research Discussion Papers 29/2007, Bank of Finland.
  4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  5. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  6. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  7. Jordi Gali, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations," NBER Working Papers 5721, National Bureau of Economic Research, Inc.
  8. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
  9. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  10. Dumas, Bernard & Harvey, Campbell R. & Ruiz, Pierre, 2003. "Are correlations of stock returns justified by subsequent changes in national outputs?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 777-811, November.
  11. Tervala, Juha, 2007. "Technology Shocks and Employment in Open Economies (rev.)," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(15 (Versi), pages 1-27.
  12. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  13. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
  14. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  15. Tervala, Juha, 2007. "Technology Shocks and Employment in Open Economies," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(15), pages 1-27.
  16. Caroline Schmidt, 2006. "International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 205-218.
  17. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  18. Robert Kollmann, 2001. "Explaining international comovements of output and asset returns: the role of money and nominal rigidities," ULB Institutional Repository 2013/7632, ULB -- Universite Libre de Bruxelles.
  19. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 521-39, December.
  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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