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Do stock markets have predictive content for exchange rate movements?

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  • Shiu‐Sheng Chen
  • Cheng‐Che Hsu

Abstract

This paper examines short‐horizon exchange rate predictability and investigates whether stock returns contain information for forecasting daily exchange rate movements. Inspired by the uncovered equity parity condition, we show that stock return differentials have in‐sample and out‐of‐sample predictive power for nominal exchange rates with short horizons (1‐day‐ahead predictions). That is, stock markets inform us about exchange rate movements, at least in the case of high‐frequency data.

Suggested Citation

  • Shiu‐Sheng Chen & Cheng‐Che Hsu, 2019. "Do stock markets have predictive content for exchange rate movements?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 38(7), pages 699-713, November.
    • Handle: RePEc:wly:jforec:v:38:y:2019:i:7:p:699-713
    DOI: 10.1002/for.2592
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    Cited by:

    1. Afees A. Salisu & Juncal Cuñado & Kazeem Isah & Rangan Gupta, 2021. "Stock markets and exchange rate behavior of the BRICS," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(8), pages 1581-1595, December.
    2. Wu, Chih-Chiang & Chen, Wei-Peng & Korsakul, Nattawadee, 2021. "Extreme linkages between foreign exchange and general financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    3. Stoupos, Nikolaos & Nikas, Christos & Kiohos, Apostolos, 2023. "Turkey: From a thriving economic past towards a rugged future? - An empirical analysis on the Turkish financial markets," Emerging Markets Review, Elsevier, vol. 54(C).

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