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Asian Review of Financial Research, Vol., No..
pp.759~819
pp.759~819
Flight-to-Quality and Correlation between Currency and Stock Returns
Jin-Wan Cho Korea University Business School
Joung Hwa Choi Seoul National University Business School
Taeyong Kim Morningstar Associates Korea 4F Dabo Bldg.
Woojin Kim Seoul National University Business School
Pair-wise analyses of a sample of nine developed and 12 emerging markets suggest that emerging country currency returns are positively correlated with their stock returns. These strong ties between currency and stock returns appear generated by international capital flows based on ¡°flight-to-quality¡± in down-markets. The positive correlation of global equity markets implies that currencies provide added risks for investors in developed nations investing in emerging markets and natural hedges for investors in emerging nations investing in developed countries. Analyses of a unique sample of 27 ¡°Siamese Twin¡± Korean international mutual fund pairs holding identical underlying foreign assets but offering different currency hedging alternatives suggest that hedging currency risks undoes the natural hedge and increases the total return volatility.
Jin-Wan Cho
Joung Hwa Choi
Taeyong Kim
Woojin Kim
Pair-wise analyses of a sample of nine developed and 12 emerging markets suggest that emerging country currency returns are positively correlated with their stock returns. These strong ties between currency and stock returns appear generated by international capital flows based on ¡°flight-to-quality¡± in down-markets. The positive correlation of global equity markets implies that currencies provide added risks for investors in developed nations investing in emerging markets and natural hedges for investors in emerging nations investing in developed countries. Analyses of a unique sample of 27 ¡°Siamese Twin¡± Korean international mutual fund pairs holding identical underlying foreign assets but offering different currency hedging alternatives suggest that hedging currency risks undoes the natural hedge and increases the total return volatility.
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