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The euro–dollar exchange rate and equity flows

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  • Kari Heimonen

Abstract

I examine equity flows between the US and the euro area and their impact on the euro–dollar exchange rate. I explain equity flows by examining the behavior of an international investor who maintains a minimum variance portfolio. An excess of euro area equity returns over US equity returns generates a flow of equity from the euro area to the US. The equity flow, the purchase of US equities by the euro‐area residents, causes appreciation (depreciation) of the dollar (euro), while the purchase of euro area equities by US residents causes appreciation (depreciation) of the euro (dollar).

Suggested Citation

  • Kari Heimonen, 2009. "The euro–dollar exchange rate and equity flows," Review of Financial Economics, John Wiley & Sons, vol. 18(4), pages 202-209, October.
    • Handle: RePEc:wly:revfec:v:18:y:2009:i:4:p:202-209
    DOI: 10.1016/j.rfe.2009.01.001
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