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

Author

Listed:
  • Nadav Ben Zeev
  • Daniel Nathan

Abstract

This paper investigates the influence of global equity market value shocks on institutional investors’ (IIs’) hedging behavior and the resultant effects on exchange rates. Employing unique granular daily data on Israeli IIs’ foreign exchange (FX) forward flows and prices and a granular instrumental variable estimation approach, we find that foreign equity market value shocks generate significant selling of U.S. dollar forwards by IIs, as a hedge against heightened FX exposure, along with significant exchange rate appreciation. A value-shock-induced one-standard-deviation increase in IIs’ supply of forward flows appreciates IIs’ forward rate by 0.53%. (JEL E44, F3, F31, G15, G23)

Suggested Citation

  • Nadav Ben Zeev & Daniel Nathan, 2024. "Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(4), pages 640-666.
    • Handle: RePEc:oup:rasset:v:14:y:2024:i:4:p:640-666.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raae012
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    Cited by:

    1. is not listed on IDEAS
    2. Nadav Ben Zeev & Daniel Nathan, 2023. "The Persistent Widening of Cross-Currency Basis: When Increased FX Swap Demand Meets Limits of Arbitrage," Working Papers 2316, Ben-Gurion University of the Negev, Department of Economics.
    3. Ben Zeev, Nadav & Nathan, Daniel, 2024. "The widening of cross-currency basis: When increased FX swap demand meets limits of arbitrage," Journal of International Economics, Elsevier, vol. 152(C).
    4. Itai Ater & Itzchak Tzachi Raz & Yannay Spitzer, 2023. "The Economic Consequences Of Democratic Backsliding Israel'S Judicial Overhaul," Israel Economic Review, Bank of Israel, vol. 21(2), pages 77-138, December.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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