Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101239
Authors: 
Park, Yung Chul
Park, Hail
Year of Publication: 
2014
Series/Report no.: 
ADBI Working Paper Series 479
Abstract: 
This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement: global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.
Subjects: 
free floating
uncovered interest rate and stock return parity conditions
currency risk
co-movement of stock prices
JEL: 
F31
F65
G15
Document Type: 
Working Paper

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