Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation

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Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation

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Vincent BODART () (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
Paul REDING () (Department of Economics, University of Namur, Belgium)

Abstract

In this paper, we develop a bivariate two factor-two country GARCH model of stock returns in order to investigate whether exchange rate fluctuations have a significant impact on the conditional mean, variance, and correlation of industry stock returns. Weekly data for seven industries in five European countries over the 1990-1998 period are used. We document that exchange rates have a significant effect on expected industry stock returns and on their volatility. The magnitude of this effect is, however, quite small. The contribution of the exchange rate factor to the time-varying correlation coefficients between two countries’industry returns is also very modest. The paper also shows that the importance of the exchange rate spillovers is influenced by the exchange rate regime, the magnitude and the direction of exchange rate shocks.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper with number 2001016.

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Length: 36
Date of creation: 01 Apr 2001
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Handle: RePEc:ctl:louvir:2001016

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-02-10 (All new papers)
NEP-CBA-2002-02-10 (Central Banking)
NEP-FMK-2002-02-10 (Financial Markets)
NEP-IFN-2002-02-10 (International Finance)

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