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

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Author Info

  • 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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Bibliographic Info

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

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

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Keywords: Industry stock returns; Fx market; Volatility; International correlation;

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References

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Cited by:
  1. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York.
  2. Bin, Feng-Shun & Morris, Gay B. & Chen, Dar-Hsin, 2003. "Effects of exchange-rate and interest-rate risk on ADR pricing behavior," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 241-262, August.
  3. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, EconWPA.

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