Abstract
This paper studies the relation among real stock returns, real capital flows and real exchange rate starting from a theoretical model. The model predicts that the capital inflows affect the real exchange rate and stock returns. Besides, there is an asymmetry between the effect of capital inflows and outflows on real exchange rate causing a “Debt Trap”. In this paper, we compare the evidence from Russia and Hong Kong. The empirical findings confirm the theoretical model for all three countries.
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