European Parliament Library

New Shocks, Exchange Rates and Equity Prices, Pietro Cova, Alessandro Rebucci, Akito Matsumoto, Massimiliano Pisani

We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies
Table Of Contents
Contents; I. Introduction; II. Model; A. Households; B. Firms; C. Market Clearing and Equilibrium; D. Stochastic Processes and Information Assumptions; III. Solution and Properties; A. News Shock and Exchange Rate Predictability; B. Exchange Rate Volatility; C. Equity Return Volatility; D. Exchange Rate and Equity Price Comovement; IV. Quantitative Analysis; A. Model Extension and Calibration; B. Impulse Responses; C. Model Evaluation; V. Conclusions; Tables; 1. Model Evaluation; 2. Volatility and Comovement of Exchange Rates and Equity Returns; Figures
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (38 p.)
Specific Material Designation
Form Of Item

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