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Equity flows, stock returns and exchange rates
Author(s) -
Kanas Angelos,
Karkalakos Sotirios
Publication year - 2017
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1574
Subject(s) - economics , equity (law) , econometrics , volatility (finance) , stock (firearms) , financial economics , autoregressive model , exchange rate , empirical evidence , monetary economics , philosophy , epistemology , mechanical engineering , political science , law , engineering
We explore the effects of equity flows between U.S. and U.K. investors upon equity and exchange rate returns within a unified empirical framework on the basis of a trivariate vector autoregressive system that incorporates mean and volatility spillovers and allows for dynamic conditional correlations. Our findings are as follows: First, we reveal strong evidence of volatility spillovers across equity returns, exchange rate returns, and equity flows. Second, we find strong evidence that U.K. investors rebalance their portfolios by engaging in a positive feedback trading known in the literature as “trend chasing.” Third, we document strong dynamic effects from net flows to equity returns, illustrating a trading rule that portfolios are dynamically adjusted over a short‐run horizon influencing changes in stock returns. Last, correlation uncertainty appears to be reduced from the start of the 1990s onwards.