Asset return dynamics and the FX risk premium in a decentralized dealer market

International order flows: Explaining equity and exchange rate returns

“…The equations in proposition 4 can be easily transformed into an expression for the analogue to uncovered interest parity for equities, namely uncovered equity returns parity (Derviz (2004), Hau and Rey (2003)). …”

“…We assume that there are four different types or groups of (atomistic) agents called 'funds'. 4 These four fund groups are listed in Table 1: International equity funds, investing in home and foreign equity; international bond funds, investing in home and foreign bonds; home country funds, investing in home equity and a home bond and foreign funds, investing in foreign equity and a foreign bond. 5 Our model therefore features a segmented market in which the exchange rate risk is not diversified.…”

“…Shiller et al (1996) document large aggregate differences of opinion on the price expectations of the Nikkei and S&P100 index across Japanese and American fund managers. 4 To justify competitive price taking behavior, we assume that each investor groups is composed of a continuium of atomistic agents. For the price equilibrium only their aggregate risk tolerance matters.…”

“…This contrasts with the shortcomings of existing models to account for deviations from uncovered interest parity. Uncovered equity parity (Hau and Rey (2003), Derviz (2004)) is the analogue to uncovered interest parity in our model. Our paper also relates to a recent literature which focuses on the role of order flow in the U.S. equity market.…”

International Order Flows: Explaining Equity and Exchange Rate Returns

“…This contrasts with the shortcomings of existing models to account for deviations from uncovered interest parity. Uncovered equity parity (Hau and Rey (2003), Derviz (2004)) is the analogue to uncovered interest parity in our model.…”