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Flight-to-quality and correlation between currency and stock returns

Author

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  • Cho, Jin-Wan
  • Choi, Joung Hwa
  • Kim, Taeyong
  • Kim, Woojin

Abstract

We document that capital flows in and out of emerging or developed markets are sensitive to global equity market conditions. Capital tends to move out of emerging into developed countries in global down markets, leading to depreciation (appreciation) of emerging (developed) currencies. This generates a positive (negative) correlation between currency and equity in emerging (developed) markets which is amplified by the magnitude of the capital movement. We also verify that hedging currency risks may undo the natural hedge and increase the total return volatility under negative correlation.

Suggested Citation

  • Cho, Jin-Wan & Choi, Joung Hwa & Kim, Taeyong & Kim, Woojin, 2016. "Flight-to-quality and correlation between currency and stock returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 191-212.
    • Handle: RePEc:eee:jbfina:v:62:y:2016:i:c:p:191-212
    DOI: 10.1016/j.jbankfin.2014.09.003
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    More about this item

    Keywords

    Flight-to-quality; Capital flows; Correlation between currency and stock returns; Currency hedging;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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