The authors Axel Jochem and Stefan Reitz demonstrate the calculation of a new stock market index informing about the price competitiveness of a country’s assets vis-à-vis its foreign competitors. In line with the portfolio balance approach we empirically identify net foreign holdings of a country’s assets as the long-run driver of the index dynamics. Both, the index and its fundamental value are discussed for a number of important economies shading new light on relative prices of financial assets in international capital markets. We show that due to a differing risk assessment of international investors, US and German stocks currently seem to be relatively expensive, while Italian, Japanese, and, to a lesser extent, French equities come at a discount.
- capital flows
- real effective exchange rate