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      DIVERSIFICATION AND REAL EXCHANGE RATE HEDGING IN EQUITY HOLDINGS

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      SIEMINSKA-THESIS.pdf (1.469Mb)
      Date
      2011-10-02
      Author
      Sieminska, Klaudia
      Type
      Thesis
      Degree Level
      Masters
      Metadata
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      Abstract
      The purpose of this paper is to examine the allocation of cross-border equity holdings and provide evidence that investors use equities to hedge real exchange fluctuations. The famous Backus-Smith (1993) condition, that relates the real exchange rates and relative consumption, is utilized in a two-country endowment economy introduced by Coeurdacier and Gourinchas (2009), in this case however, only stocks are traded. An important relationship between the real exchange rates, relative returns and equity positions is uncovered and subsequently incorporated into a gravity model developed by Coeurdacier and Guibaud (2011). Based on the uncovered relationship a new explanatory variable representing the correlation between the changes in real exchange rates and excess returns is utilized as a measure of the variation in bilateral equity holdings. If negative correlations imply home bias and positive correlations foreign bias, then given the particular market characteristics, the model measures whether investors hold equities to hedge the fluctuations in real exchange rate returns to smooth consumption. Although the primary results confirm the proposition, the findings vary with respect to the specifications included, and more empirical testing should be conducted.
      Degree
      Master of Arts (M.A.)
      Department
      Economics
      Program
      Economics
      Supervisor
      Chaban, Maxym; St. Louis, Larry
      Committee
      Lucas, Robert; Pollak, Andreas; Wilson, Craig
      Copyright Date
      August 2011
      URI
      http://hdl.handle.net/10388/ETD-2011-08-84
      Subject
      Diversification
      Home Bias
      Hedging
      Real Exchange Rate
      Relative Equity Returns
      Gravity Model
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