Purpose - This paper aims to increase understanding of the (time-varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of exchange rate movements on firm value by regressing multinationals’ stock returns on exchange rate...

Purpose – This paper aims to increase understanding of the (time‐varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of exchange rate movements on firm value by regressing multinationals’ stock returns on exchange...

This article demonstrates that carry trade is part of the explanation of foreign exchange rate puzzles. We introduce carry traders in a heterogeneous agent model in addition to fundamentalists and chartists. Our model has the ability to produce the stylized facts observed in empirical exchange...