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Short-horizon excess returns and exchange rate and interest rate effects

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  • Joseph, Nathan Lael
  • Lambertides, Neophytos
  • Savva, Christos S.

Abstract

We examine the effects of foreign exchange (FX) and interest rate changes on the excess returns of U.S. stocks, for short-horizons of 1–40 days. Our new evidence shows a tendency for the volatility of both excess returns and FX rate changes to be negatively related with FX rate and interest rate effects. Both the number of firms with significant FX rate and interest rate effects and the magnitude of their exposures increase with the length of the return horizon. Our finding seems inconsistent with the view that firms hedge effectively at short-return horizons.

Suggested Citation

  • Joseph, Nathan Lael & Lambertides, Neophytos & Savva, Christos S., 2015. "Short-horizon excess returns and exchange rate and interest rate effects," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 54-76.
    • Handle: RePEc:eee:intfin:v:37:y:2015:i:c:p:54-76
    DOI: 10.1016/j.intfin.2015.04.005
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    Cited by:

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    2. Snaith, Stuart & Termprasertsakul, Santi & Wood, Andrew, 2017. "The exchange rate exposure puzzle: The long and the short of it," Economics Letters, Elsevier, vol. 159(C), pages 204-207.
    3. Peng, Wei & Hu, Shichao & Chen, Wang & Zeng, Yu-feng & Yang, Lu, 2019. "Modeling the joint dynamic value at risk of the volatility index, oil price, and exchange rate," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 137-149.

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    More about this item

    Keywords

    Exchange rate and interest rate effects; Smooth transition function; Bivariate GJR-GARCH-M; Time-varying conditional correlations; Fama–French–Carhart (FFC) factors;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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