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

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  • Nathan, Daniel
  • Ben Zeev, Nadav

Abstract

The equity hedging channel predicts that institutional investors’ (IIs’) hedging of their foreign equity position’s FX exposure via foreign currency forward contracts leads to a positive relation between this position and IIs’ supply of foreign currency forwards; in equilibrium, this prediction implies a negative relation between foreign equity prices and forward and spot rates. We use novel daily data on Israeli IIs’ FX forward flows to test this equity hedging channel within a suitable Bayesian local projection model, finding strong evidence supporting a meaningful such channel.

Suggested Citation

  • Nathan, Daniel & Ben Zeev, Nadav, 2022. "Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination," MPRA Paper 112909, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112909
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Equity Hedging Channel; Foreign Currency Forward Flows; Forward Exchange Rate; Spot Exchange Rate; Global Stock Prices; Institutional Investors; Bayesian Local Projections.;
    All these keywords.

    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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