IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/halshs-03007904.html
   My bibliography  Save this paper

Exchange Rates, Stock Prices, and Stock Market Uncertainty

Author

Listed:
  • Fatemeh Salimi

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

While the reference framework for international portfolio choice emphasizes a mean-variance framework, uncovered parity conditions only involve mean stock or bond returns. We propose to augment the empirical specification by using the relative stock market uncertainty of two countries as an extra determinant of their bilateral exchange rate returns. A rise in the relative uncertainty of one stock market will lead capital to flow to the other stock market and generate an appreciation in the currency of the latter. By focusing on the JPY/USD exchange rate returns during the most recent decade (2009-2019) and relying on a nonlinear framework, we provide evidence that the Japanese-US differential stock market uncertainty affects the JPY/USD returns both contemporaneously and with weekly lags. This finding is robust when we control for the stock returns differential and the differential changes in Japanese and US unconventional monetary policy measures.

Suggested Citation

  • Fatemeh Salimi, 2020. "Exchange Rates, Stock Prices, and Stock Market Uncertainty," Working Papers halshs-03007904, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03007904
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03007904
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-03007904/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    2. Glick, Reuven & Leduc, Sylvain, 2012. "Central bank announcements of asset purchases and the impact on global financial and commodity markets," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2078-2101.
    3. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
    4. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    5. Laurent Ferrara & Stéphane Lhuissier & Fabien Tripier, 2018. "Uncertainty Fluctuations: Measures, Effects and Macroeconomic Policy Challenges," Financial and Monetary Policy Studies, in: Laurent Ferrara & Ignacio Hernando & Daniela Marconi (ed.), International Macroeconomics in the Wake of the Global Financial Crisis, pages 159-181, Springer.
    6. Harada, Kimie & Okimoto, Tatsuyoshi, 2021. "The BOJ's ETF purchases and its effects on Nikkei 225 stocks," International Review of Financial Analysis, Elsevier, vol. 77(C).
    7. Soojin Jo & Rodrigo Sekkel, 2019. "Macroeconomic Uncertainty Through the Lens of Professional Forecasters," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(3), pages 436-446, July.
    8. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2020. "Flights to Safety," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 689-746.
    9. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    10. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2018. "On the International Spillovers of US Quantitative Easing," Economic Journal, Royal Economic Society, vol. 128(608), pages 330-377, February.
    11. Fratzscher, Marcel, 2012. "Capital flows, push versus pull factors and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 341-356.
    12. Neely, Christopher J., 2015. "Unconventional monetary policy had large international effects," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 101-111.
    13. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    14. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    15. Londono, Juan M. & Zhou, Hao, 2017. "Variance risk premiums and the forward premium puzzle," Journal of Financial Economics, Elsevier, vol. 124(2), pages 415-440.
    16. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    17. Arbatli Saxegaard, Elif C. & Davis, Steven J. & Ito, Arata & Miake, Naoko, 2022. "Policy uncertainty in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 64(C).
    18. Smith, Aaron & Naik, Prasad A. & Tsai, Chih-Ling, 2006. "Markov-switching model selection using Kullback-Leibler divergence," Journal of Econometrics, Elsevier, vol. 134(2), pages 553-577, October.
    19. Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
    20. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    21. Litterman, Robert B, 1983. "A Random Walk, Markov Model for the Distribution of Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 169-173, April.
    22. Zacharias Psaradakis & Nicola Spagnolo, 2003. "On The Determination Of The Number Of Regimes In Markov‐Switching Autoregressive Models," Journal of Time Series Analysis, Wiley Blackwell, vol. 24(2), pages 237-252, March.
    23. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    24. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
    25. Jae Sim & Egon Zakrajsek & Simon Gilchrist, 2010. "Uncertainty, Financial Frictions, and Investment Dynamics," 2010 Meeting Papers 1285, Society for Economic Dynamics.
    26. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    27. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series 529, European Central Bank.
    28. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    29. Mr. Ravi Balakrishnan & Stefan Laseen & Mr. Andrea Pescatori, 2016. "U.S. Dollar Dynamics: How Important Are Policy Divergence and FX Risk Premiums?," IMF Working Papers 2016/125, International Monetary Fund.
    30. Marine Carrasco & Liang Hu & Werner Ploberger, 2014. "Optimal Test for Markov Switching Parameters," Econometrica, Econometric Society, vol. 82(2), pages 765-784, March.
    31. Ferrara, Laurent & Marsilli, Clément & Ortega, Juan-Pablo, 2014. "Forecasting growth during the Great Recession: is financial volatility the missing ingredient?," Economic Modelling, Elsevier, vol. 36(C), pages 44-50.
    32. Erlend Nier & Tahsin Saadi Sedik & Tomas Mondino, 2014. "Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?," IMF Working Papers 2014/196, International Monetary Fund.
    33. Rey, Hélène & Hau, Harald, 2008. "Global Portfolio Rebalancing Under the Microscope," CEPR Discussion Papers 6901, C.E.P.R. Discussion Papers.
    34. Guglielmo Maria Caporale & Menelaos Karanasos & Stavroula Yfanti, 2019. "Macro-Financial Linkages in the High-Frequency Domain: The Effects of Uncertainty on Realized Volatility," CESifo Working Paper Series 8000, CESifo.
    35. Adler, Michael & Dumas, Bernard, 1983. "International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-984, June.
    Full references (including those not matched with items on IDEAS)

    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. Fatemeh Salimi Namin, 2020. "Exchange Rates, Stock Prices, and Stock Market Uncertainty," AMSE Working Papers 2037, Aix-Marseille School of Economics, France.
    2. Shinohara, Takeshi & Okuda, Tatsushi & Nakajima, Jouchi, 2021. "Characteristics of Uncertainty Indices in the Macroeconomy," Economic Review, Hitotsubashi University, vol. 72(3), pages 246-267, July.
    3. Danilo Cascaldi-Garcia & Cisil Sarisoy & Juan M. Londono & Bo Sun & Deepa D. Datta & Thiago Ferreira & Olesya Grishchenko & Mohammad R. Jahan-Parvar & Francesca Loria & Sai Ma & Marius Rodriguez & Ilk, 2023. "What Is Certain about Uncertainty?," Journal of Economic Literature, American Economic Association, vol. 61(2), pages 624-654, June.
    4. Girardin, Eric & Salimi Namin, Fatemeh, 2019. "The January effect in the foreign exchange market: Evidence for seasonal equity carry trades," Economic Modelling, Elsevier, vol. 81(C), pages 422-439.
    5. Costantini, Mauro & Sousa, Ricardo M., 2022. "What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality," Journal of International Money and Finance, Elsevier, vol. 122(C).
    6. Laurent Ferrara & Stéphane Lhuissier & Fabien Tripier, 2018. "Uncertainty Fluctuations: Measures, Effects and Macroeconomic Policy Challenges," Financial and Monetary Policy Studies, in: Laurent Ferrara & Ignacio Hernando & Daniela Marconi (ed.), International Macroeconomics in the Wake of the Global Financial Crisis, pages 159-181, Springer.
    7. Ding, Yibing & Liu, Ziyu & Liu, Dayu, 2022. "Structural news shock, financial market uncertainty and China's business fluctuations," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    8. Oscar Claveria, 2021. "Disagreement on expectations: firms versus consumers," SN Business & Economics, Springer, vol. 1(12), pages 1-23, December.
    9. Forni, Mario & Gambetti, Luca & Sala, Luca, 2021. "Downside and Upside Uncertainty Shocks," CEPR Discussion Papers 15881, C.E.P.R. Discussion Papers.
    10. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.
    11. Himounet, Nicolas, 2022. "Searching the nature of uncertainty: Macroeconomic and financial risks VS geopolitical and pandemic risks," International Economics, Elsevier, vol. 170(C), pages 1-31.
    12. Laurent Ferrara & Pierre Guérin, 2018. "What are the macroeconomic effects of high‐frequency uncertainty shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(5), pages 662-679, August.
    13. Helmut Herwartz & Alexander Lange, 2024. "How certain are we about the role of uncertainty in the economy?," Economic Inquiry, Western Economic Association International, vol. 62(1), pages 126-149, January.
    14. Angus Moore, 2017. "Measuring Economic Uncertainty and Its Effects," The Economic Record, The Economic Society of Australia, vol. 93(303), pages 550-575, December.
    15. Michael Ryan, 2020. "An Anchor in Stormy Seas: Does Reforming Economic Institutions Reduce Uncertainty? Evidence from New Zealand," Working Papers in Economics 20/11, University of Waikato.
    16. Caldara, Dario & Fuentes-Albero, Cristina & Gilchrist, Simon & Zakrajšek, Egon, 2016. "The macroeconomic impact of financial and uncertainty shocks," European Economic Review, Elsevier, vol. 88(C), pages 185-207.
    17. Meinen, Philipp & Roehe, Oke, 2017. "On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area," European Economic Review, Elsevier, vol. 92(C), pages 161-179.
    18. Choi, Sangyup & Furceri, Davide, 2019. "Uncertainty and cross-border banking flows," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 260-274.
    19. Sheen, Jeffrey & Wang, Ben Zhe, 2021. "Measuring macroeconomic disagreement – A mixed frequency approach," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 547-566.
    20. Ozturk, Ezgi O. & Sheng, Xuguang Simon, 2018. "Measuring global and country-specific uncertainty," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 276-295.

    More about this item

    Keywords

    exchange rate determination; implied volatility; UEP; flight to safety; flight to quality;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:hal:wpaper:halshs-03007904. 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: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    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.