IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v47y2015i18p1883-1898.html
   My bibliography  Save this article

Location, location, location: currency effects and return predictability?

Author

Listed:
  • Steven J. Jordan
  • Andrew Vivian
  • Mark E. Wohar

Abstract

Most international financial market studies that compare across countries utilize the US dollar as the common numeraire. We explore the little studied question of the appropriate choice for the base currency and ask if currency choice can affect the final conclusion of whether predictability exists. We provide empirical results for stock return predictability that demonstrate the importance of the numeraire. For example, the existence (absence) of predictability for a US investor does not necessarily imply the existence (absence) of predictability for other foreign investors.

Suggested Citation

  • Steven J. Jordan & Andrew Vivian & Mark E. Wohar, 2015. "Location, location, location: currency effects and return predictability?," Applied Economics, Taylor & Francis Journals, vol. 47(18), pages 1883-1898, April.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:18:p:1883-1898
    DOI: 10.1080/00036846.2014.1000537
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00036846.2014.1000537
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036846.2014.1000537?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2012. "Currency momentum strategies," Journal of Financial Economics, Elsevier, vol. 106(3), pages 660-684.
    2. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, vol. 24(4), pages 369-404.
    3. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011. "Do Peso Problems Explain the Returns to the Carry Trade?," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 853-891.
    4. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    5. Atsushi Inoue & Lutz Kilian, 2005. "In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use?," Econometric Reviews, Taylor & Francis Journals, vol. 23(4), pages 371-402.
    6. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    7. Xinge Zhao, 2008. "Determinants of flows into retail international equity funds," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(7), pages 1169-1177, October.
    8. Mahajan, Arvind & Tartaroglu, Semih, 2008. "Equity market timing and capital structure: International evidence," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 754-766, May.
    9. Andy C.W. Chui & Sheridan Titman & K.C. John Wei, 2010. "Individualism and Momentum around the World," Journal of Finance, American Finance Association, vol. 65(1), pages 361-392, February.
    10. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    11. Rapach, David E. & Wohar, Mark E., 2006. "In-sample vs. out-of-sample tests of stock return predictability in the context of data mining," Journal of Empirical Finance, Elsevier, vol. 13(2), pages 231-247, March.
    12. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
    13. Patro, Dilip K. & Wald, John K. & Wu, Yangru, 2014. "Currency devaluation and stock market response: An empirical analysis," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 79-94.
    14. Barras, Laurent, 2007. "International conditional asset allocation under specification uncertainty," Journal of Empirical Finance, Elsevier, vol. 14(4), pages 443-464, September.
    15. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
    16. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
    17. Rangvid, Jesper, 2006. "Output and expected returns," Journal of Financial Economics, Elsevier, vol. 81(3), pages 595-624, September.
    18. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," The Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-428.
    19. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    20. Rapach, David E. & Wohar, Mark E., 2009. "Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 427-453, April.
    21. Potì, Valerio & Siddique, Akhtar, 2013. "What drives currency predictability?," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 86-106.
    22. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
    23. Nelson, Charles R & Kim, Myung J, 1993. "Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, vol. 48(2), pages 641-661, June.
    24. Sea-Jin Chang & Jay Hyuk Rhee, 2011. "Rapid FDI expansion and firm performance," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(8), pages 979-994, October.
    25. Du, Ding, 2014. "Persistent exchange-rate movements and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 36-53.
    26. Elitsa R Banalieva & Kimberly A Eddleston, 2011. "Home-region focus and performance of family firms: The role of family vs non-family leaders," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(8), pages 1060-1072, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adam Zaremba, 2019. "The Cross Section of Country Equity Returns: A Review of Empirical Literature," JRFM, MDPI, vol. 12(4), pages 1-26, October.
    2. Kim, Daehwan & Moneta, Fabio, 2021. "Long-term foreign exchange risk premia and inflation risk," International Review of Financial Analysis, Elsevier, vol. 78(C).
    3. Lawrenz, Jochen & Zorn, Josef, 2017. "Predicting international stock returns with conditional price-to-fundamental ratios," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 159-184.
    4. Zaremba, Adam & Szyszka, Adam & Long, Huaigang & Zawadka, Dariusz, 2020. "Business sentiment and the cross-section of global equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    5. Li, Zeming & Sakkas, Athanasios & Urquhart, Andrew, 2022. "Intraday time series momentum: Global evidence and links to market characteristics," Journal of Financial Markets, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.
    2. Sousa, Ricardo M. & Vivian, Andrew & Wohar, Mark E., 2016. "Predicting asset returns in the BRICS: The role of macroeconomic and fundamental predictors," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 122-143.
    3. Jordan, Steven J. & Vivian, Andrew & Wohar, Mark E., 2017. "Forecasting market returns: bagging or combining?," International Journal of Forecasting, Elsevier, vol. 33(1), pages 102-120.
    4. Gupta, Rangan & Modise, Mampho P., 2013. "Macroeconomic Variables and South African Stock Return Predictability," Economic Modelling, Elsevier, vol. 30(C), pages 612-622.
    5. Li, Zeming & Sakkas, Athanasios & Urquhart, Andrew, 2022. "Intraday time series momentum: Global evidence and links to market characteristics," Journal of Financial Markets, Elsevier, vol. 57(C).
    6. Ferreira, Miguel A. & Santa-Clara, Pedro, 2011. "Forecasting stock market returns: The sum of the parts is more than the whole," Journal of Financial Economics, Elsevier, vol. 100(3), pages 514-537, June.
    7. Jamali, Ibrahim & Yamani, Ehab, 2019. "Out-of-sample exchange rate predictability in emerging markets: Fundamentals versus technical analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 241-263.
    8. Rossi, Barbara, 2013. "Advances in Forecasting under Instability," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1203-1324, Elsevier.
    9. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
    10. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
    11. Kirstin Hubrich & Kenneth D. West, 2010. "Forecast evaluation of small nested model sets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 574-594.
    12. Inoue, Atsushi & Kilian, Lutz, 2006. "On the selection of forecasting models," Journal of Econometrics, Elsevier, vol. 130(2), pages 273-306, February.
    13. Clark, Todd & McCracken, Michael, 2013. "Advances in Forecast Evaluation," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1107-1201, Elsevier.
    14. Todd E. Clark & Kenneth D. West, 2005. "Using Out-of-Sample Mean Squared Prediction Errors to Test the Martingale Difference," NBER Technical Working Papers 0305, National Bureau of Economic Research, Inc.
    15. Brooks, Chris & Burke, Simon P. & Stanescu, Silvia, 2016. "Finite sample weighting of recursive forecast errors," International Journal of Forecasting, Elsevier, vol. 32(2), pages 458-474.
    16. Westerlund, Joakim & Narayan, Paresh Kumar, 2012. "Does the choice of estimator matter when forecasting returns?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2632-2640.
    17. Gupta, Rangan & Modise, Mampho P., 2012. "South African stock return predictability in the context data mining: The role of financial variables and international stock returns," Economic Modelling, Elsevier, vol. 29(3), pages 908-916.
    18. Ekaterini Panopoulou & Sotiria Plastira, 2014. "Fama French factors and US stock return predictability," Journal of Asset Management, Palgrave Macmillan, vol. 15(2), pages 110-128, April.
    19. Burns, Kelly & Moosa, Imad A., 2015. "Enhancing the forecasting power of exchange rate models by introducing nonlinearity: Does it work?," Economic Modelling, Elsevier, vol. 50(C), pages 27-39.
    20. Xue Jiang & Liyan Han & Libo Yin, 2019. "Can skewness of the futures‐spot basis predict currency spot returns?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1435-1449, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:47:y:2015:i:18:p:1883-1898. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.