The euro–dollar exchange rate and equity flows

Kari Heimonen

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

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).

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References

1994Comparing Predictive Accuracy 1983Empirical exchange rate models of the seventies 2004The determinants of cross-border equity flows 1997International Portfolio Investment Flows 1995Home bias and high turnover 2001The Microstructure Approach to Exchange Rates 2001The portfolio flows of international investors 2005Exchange Rates, Equity Prices, and Capital Flows

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2015Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model

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