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Private Information, Capital Flows, and Exchange Rates

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  • Jacob Gyntelberg
  • Subhanij Tientip
  • Mico Loretan

Abstract

We demonstrate empirically that not all capital flows influence exchange rates equally: Capital flows induced by foreign investors’ stock market transactions have both an economically significant and a permanent impact on exchange rates, whereas capital flows induced by foreign investors’ transactions in government bond markets do not. We relate these differences in the price impact of capital flows to differences in the amounts of private information conveyed by these flows. Our empirical findings are based on novel, daily-frequency datasets on prices and quantities of all transactions of foreign investors in the stock, bond, and onshore FX markets of Thailand.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/213.

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Length: 28
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/213

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Related research

Keywords: Capital flows; Exchange rates; Foreign investment; Stock markets; Economic models; bond; bond market; stock market; bonds; bond markets; financial markets; hedging; equity market; government bond; financial institutions; stock market transactions; money market; financial assets; bond transactions; stock exchange; bond flows; hedge; government bond markets; hedge funds; government bond market; money market instruments; corporate bonds; equity markets; financial market; domestic capital; financial economics; domestic financial institutions; stock price; foreign investment stock; domestic financial markets; portfolio investment; outstanding corporate bonds; money market operations; secondary bond market; domestic capital market; bond securities; secondary bond markets; stock prices; stock market index; reserve requirement; stock trades; stock market price; domestic capital markets; stock price volatility; money markets; domestic money market; international finance;

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  1. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
  2. Abhakorn, Pongrapeeporn & Tantisantiwong, Nongnuch, 2012. "A reexamination of capital controls’ effectiveness: Recent experience of Thailand," Journal of Asian Economics, Elsevier, vol. 23(1), pages 26-38.
  3. Killeen, William P. & Lyons, Richard K. & Moore, Michael J., 2006. "Fixed versus flexible: Lessons from EMS order flow," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 551-579, June.
  4. Albuquerque, Rui & de Francisco, Eva & Marques, Luis, 2006. "Marketwide Private Information in Stocks: Forecasting Currency Returns," CEPR Discussion Papers 5604, C.E.P.R. Discussion Papers.
  5. Gehrig, Thomas & Menkhoff, Lukas, 2004. "The use of flow analysis in foreign exchange: exploratory evidence," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 573-594, June.
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