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Idiosyncratic volatility, economic fundamentals, and foreign exchange rates

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  • Hui Guo
  • Robert Savickas
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Abstract

This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample tests, even after we use a bootstrap procedure to explicitly account for data mining. We also document a positive and significant relation between a country’s idiosyncratic volatility and the future U.S. dollar price of its currency—in France, Germany, and Japan. Moreover, among a number of commonly used financial variables, only idiosyncratic volatility forecasts output growth in both U.S. and foreign countries. Our results suggest that there might be a close link between exchange rates and economic fundamentals. ; Earlier title: Foreign exchange rates don't follow a random walk

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-025.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2005-025

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Keywords: Foreign exchange ; International finance;

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Cited by:
  1. Ariño, Miguel A. & Canela, Miguel A., 2006. "Study of the dollar-euro exchange rate," IESE Research Papers D/620, IESE Business School, revised 30 Mar 2006.

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