Devaluation Expectations and the Stock Market
Using company-level data, this paper examines the relative stock-market performance of firms with different foreign-exchange exposures around the time of the 1994/95 Mexican crisis. Contrary to what one might have expected given the alleged peso overvaluation, exporting firms outperformed the market beginning in late 1993. Although interest rates fail to show a clear confidence loss in the exchange rate regime, the relative performance of net exporters suggests that expectations of devaluation increased continuously. The methodology presented is relevant beyond the Mexican case: sectoral differences in stock market performance may constitute valuable leading indicators of exchange rate changes in emerging markets.
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Paper provided by International Monetary Fund in its series IMF Working Papers
Date of creation:
01 Jan 2000Date of revision:
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Related researchKeywords: Devaluation
; Stock markets
; Exchange rate regimes
; Economic models
; exchange rate
; stock market
; exchange rate expectations
; exchange rates
; exchange rate regime
; stock prices
; financial sector
; nominal exchange rate
; exchange rate movements
; currency risk
; currency crises
; exchange rate exposure
; exchange rate change
; devaluation period
; shadow exchange rate
; stock returns
; fixed exchange rate
; exchange rate changes
; shadow ? exchange rates
; stock market index
; stock exchange
; floating exchange rate
; fixed exchange rate regime
; international capital markets
; international capital
; domestic interest rates
; flexible exchange rate
; foreign exchange
; international finance
; exchange rate devaluations
; shadow ? exchange rate
; forward exchange rate
; financial instruments
; financial system
; exchange rate band
; currency crisis
; forward exchange
; real exchange rate
; floating exchange rate regime
; exchange rate crises
; shadow exchange rates
; stock valuation
; fixed exchange rate regimes
; government bonds
; stock price
; emerging market stock
; financial structure
; currency units
; international financial markets
; spot exchange rates
; asset bubbles
; exchange rate peg
; bond market
; stock market indices
; foreign exchange market
; foreign investment
; equilibrium exchange rate
; financial economics
; exchange rate fluctuations
; emerging markets ? stock
; financial derivatives
; flexible exchange rate regime
; short-term bonds
; term bonds
; current exchange rate
; financial liberalization
; present value
; financial markets
; emerging market stocks
; international finance corporation
; money market
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- Mendoza, Enrique G. & Uribe, Martin, 2000.
"Devaluation risk and the business-cycle implications of exchange-rate management,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 53(1), pages 239-296, December.
- Chortareas, Georgios & Cipollini, Andrea & Eissa, Mohamed Abdelaziz, 2012.
"Switching to floating exchange rates, devaluations, and stock returns in MENA countries,"
International Review of Financial Analysis,
Elsevier, vol. 21(C), pages 119-127.
- Narayan, Paresh Kumar & Narayan, Seema & Popp, Stephan & D'Rosario, Michael, 2011.
"Share price clustering in Mexico,"
International Review of Financial Analysis,
Elsevier, vol. 20(2), pages 113-119, April.
- Kanas, Angelos, 2005.
"Regime linkages between the Mexican currency market and emerging equity markets,"
Elsevier, vol. 22(1), pages 109-125, January.
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