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Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change

  • Hau, Harald
  • Massa, Massimo
  • Peress, Joël

Do exchange rates react to exogenous capital movements? We explore this issue based on the redefinition of the MSCI international equity indices announced on 10 December 2000 and implemented in two steps on 30 November 2001 and 31 May 2002. The index changes implied major changes in the representation of different countries in the MSCI world index. Our event study shows a strong announcement effect in which countries with a decreasing equity representation vis-a-vis the US depreciated against the dollar. Around the two implementation dates, we find further systematic, but opposite, exchange rate effects, which can be interpreted as a result of excessive speculation on the first implementation date and insufficient speculation on the second date.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4862.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4862
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  1. Evans, Martin D. D. & Lyons, Richard K., 2002. "Time-varying liquidity in foreign exchange," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1025-1051, July.
  2. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  3. William N. Goetzmann & Massimo Massa, 1999. "Index Funds and Stock Market Growth," NBER Working Papers 7033, National Bureau of Economic Research, Inc.
  4. Martin Evans and Richard K. Lyons, 2002. "Informational Integration and FX Trading," Working Papers gueconwpa~02-02-11, Georgetown University, Department of Economics.
  5. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
  6. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
  7. Harald Hau & Helene Rey, 2004. "Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?," NBER Working Papers 10476, National Bureau of Economic Research, Inc.
  8. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms," Harvard Institute of Economic Research Working Papers 1978, Harvard - Institute of Economic Research.
  9. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," The Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January.
  10. Harald Hau & William Killeen & Michael Moore, 2002. "How has the euro changed the foreign exchange market?," Economic Policy, CEPR;CES;MSH, vol. 17(34), pages 149-192, 04.
  11. Kenneth A. Froot & Tarun Ramadorai, 2005. "Currency Returns, Intrinsic Value, and Institutional-Investor Flows," Journal of Finance, American Finance Association, vol. 60(3), pages 1535-1566, 06.
  12. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
  13. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
  14. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April.
  15. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February.
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