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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

    (BGU)

  • Daniel Nathan

    (University of Pennsylvania and Bank of Israel)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Nadav Ben Zeev & Daniel Nathan, 2023. "Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination," Working Papers 2315, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:2315
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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

    Exchange Rate Determination; Equity Hedging Channel; Foreign Currency Forward Flows; Order Flow; Limits of Arbitrage; FX Dealers; Forward Exchange Rate; Spot Exchange Rate; Global Stock Prices; Institutional Investors; Granular Instrumental Variable; 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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