Capital Flows, Financial Asset Prices and Real Financial Market Exchange Rate: A Case Study for an Emerging Market, India
DOI:
https://doi.org/10.6000/1929-7092.2013.02.13Keywords:
Short-term Capital Movements, Foreign Exchange, International Financial Markets, IndiaAbstract
Abstract: In this paper we empirically investigate the relationship between capital flows and exchange rates in India based on a new index of real effective exchange rates for the Indian Rupee. Instead of using consumer price indices we deflate exchange rates by MSCI asset price indices. The cointegration analysis indicates a long-run equilibrium relationship between real financial market exchange rate and the net outstanding equity investment in India. In the short run capital inflows are accompanied by an appreciation of real financial exchange rate of the Rupee.
References
Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2001. ""Emerging equity markets and economic development,"" Journal of Development Economics, 66(2), 465-504.
http://dx.doi.org/10.1016/S0304-3878(01)00171-7
Chayawadee Chai-Anant and Corrinne Ho (2008), “Understanding Asian equity flows, market returns and exchange rates”, BIS Working Papers, No 245.
Deutsche Bundesbank (2011) “Effective exchange rates from financial market data”, Monthly Report April 2011.
Harald Hau & Hélène Rey (2004), ""Can portfolio rebalancing explain the dynamics of equity returns, equity flows, and exchange rates?,"" American Economic Review, 94(2), 126-133.
http://dx.doi.org/10.1257/0002828041302389
Hau, H. And Rey, H. (2006), 2006, Exchange rates, equity prices, and capital flows, Review of Financial Studies 19, 273-317.
http://dx.doi.org/10.1093/rfs/hhj008
Heimonen K. (2009), The euro-dollar exchange rate and equity flows, Review of Financial Economics 18, S. 202-209.
http://dx.doi.org/10.1016/j.rfe.2009.01.001
Gyntelberg Jacob, Mico Loretan, Tientip Subhanij, Eric Chan (2009) International portfolio rebalancing and exchange rate fluctuations in Thailand, BIS Working Papers, No 287.
Lane Philip R. and Gian Maria Milesi-Ferretti (2007), ""The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004"", Journal of International Economics 73, November, 223-250.
http://dx.doi.org/10.1016/j.jinteco.2007.02.003
Lane, Philip R., and Jay C. Shambaugh. 2010. ""Financial exchange rates and international currency exposures."" American Economic Review, 100(1): 518-40.
http://dx.doi.org/10.1257/aer.100.1.518
Portes, Richard and Rey, Helene, (2005) ""The determinants of cross-border equity flows,"" Journal of International Economics, 65(2), 269-296.
http://dx.doi.org/10.1016/j.jinteco.2004.05.002
Reserve Bank of India (2010), Report on Currency and Finance 2008-09 (RCF), Annual Research Publication, Reserve Bank of India.
Brooks Robin & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. ""Exchange rates and capital flows,"" European Financial Management, Wiley Blackwell Ltd, vol. 10(3), pages 511-533.
http://dx.doi.org/10.1111/j.1354-7798.2004.00261.x
Tille, Cedric. 2003, The impact of exchange rate movements on U.S. foreign debt."" Current Issues in Economics and Finance, 9(1).
http://dx.doi.org/10.1016/S0304-3878(01)00171-7
Chayawadee Chai-Anant and Corrinne Ho (2008), “Understanding Asian equity flows, market returns and exchange rates”, BIS Working Papers, No 245.
Deutsche Bundesbank (2011) “Effective exchange rates from financial market data”, Monthly Report April 2011.
Harald Hau & Hélène Rey (2004), ""Can portfolio rebalancing explain the dynamics of equity returns, equity flows, and exchange rates?,"" American Economic Review, 94(2), 126-133.
http://dx.doi.org/10.1257/0002828041302389
Hau, H. And Rey, H. (2006), 2006, Exchange rates, equity prices, and capital flows, Review of Financial Studies 19, 273-317.
http://dx.doi.org/10.1093/rfs/hhj008
Heimonen K. (2009), The euro-dollar exchange rate and equity flows, Review of Financial Economics 18, S. 202-209.
http://dx.doi.org/10.1016/j.rfe.2009.01.001
Gyntelberg Jacob, Mico Loretan, Tientip Subhanij, Eric Chan (2009) International portfolio rebalancing and exchange rate fluctuations in Thailand, BIS Working Papers, No 287.
Lane Philip R. and Gian Maria Milesi-Ferretti (2007), ""The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004"", Journal of International Economics 73, November, 223-250.
http://dx.doi.org/10.1016/j.jinteco.2007.02.003
Lane, Philip R., and Jay C. Shambaugh. 2010. ""Financial exchange rates and international currency exposures."" American Economic Review, 100(1): 518-40.
http://dx.doi.org/10.1257/aer.100.1.518
Portes, Richard and Rey, Helene, (2005) ""The determinants of cross-border equity flows,"" Journal of International Economics, 65(2), 269-296.
http://dx.doi.org/10.1016/j.jinteco.2004.05.002
Reserve Bank of India (2010), Report on Currency and Finance 2008-09 (RCF), Annual Research Publication, Reserve Bank of India.
Brooks Robin & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. ""Exchange rates and capital flows,"" European Financial Management, Wiley Blackwell Ltd, vol. 10(3), pages 511-533.
http://dx.doi.org/10.1111/j.1354-7798.2004.00261.x
Tille, Cedric. 2003, The impact of exchange rate movements on U.S. foreign debt."" Current Issues in Economics and Finance, 9(1).
Downloads
Published
2013-05-14
How to Cite
Ghosh, S., & Reitz, S. (2013). Capital Flows, Financial Asset Prices and Real Financial Market Exchange Rate: A Case Study for an Emerging Market, India. Journal of Reviews on Global Economics, 2, 158–171. https://doi.org/10.6000/1929-7092.2013.02.13
Issue
Section
Articles
License
Policy for Journals/Articles with Open Access
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are permitted and encouraged to post links to their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work
Policy for Journals / Manuscript with Paid Access
Authors who publish with this journal agree to the following terms:
- Publisher retain copyright .
- Authors are permitted and encouraged to post links to their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work .
