Nonlinear Links between Stock Returns and Exchange Rate Movements
AbstractEmpirical evidence suggests that the link between exchange rate movements and stock returns may be nonlinear. This evidence could reflect fundamental economic effects like, for example, transaction costs in international goods market arbitrage. It could also reflect market inefficiencies if investors could exploit the nonlinearity to systematically improve the performance of simple trading rules. Using monthly data for major North-American and European industrial countries for the period 1973-2006, we found that it would have been difficult for an investor to use information on nonlinearities to improve the performance of a simple trading rule based on out-of-sample forecasts of stock returns.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 558.
Date of creation: Sep 2006
Date of revision:
Stock returns; exchange rate movements; nonlinearities;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-12 (All new papers)
- NEP-FOR-2006-11-12 (Forecasting)
- NEP-IFN-2006-11-12 (International Finance)
- NEP-MAC-2006-11-12 (Macroeconomics)
- NEP-RMG-2006-11-12 (Risk Management)
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