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Currency devaluation and stock market response: An empirical analysis


  • Patro, Dilip K.
  • Wald, John K.
  • Wu, Yangru


We study local stock market reaction to currency devaluation by a country's central bank. Devaluations appear to be anticipated by the local stock markets, and there are significant negative abnormal returns even one year prior to the announcement of the devaluation. A negative trend in stock returns persists for up to one quarter following the first announcement, and then becomes positive thereafter, suggesting a reversal. We explore whether changes in macroeconomic variables prior to currency devaluations are related to abnormal stock returns. We find that stock returns are significantly lower if the devaluation is larger and if the country is a developing nation. Furthermore, stock markets decline more around devaluations if reserves are lower, if the real exchange rate has depreciated over the prior years, if the capital account has declined, if the current account deficit has gone up, or if the country credit rating has deteriorated.

Suggested Citation

  • Patro, Dilip K. & Wald, John K. & Wu, Yangru, 2014. "Currency devaluation and stock market response: An empirical analysis," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 79-94.
  • Handle: RePEc:eee:jimfin:v:40:y:2014:i:c:p:79-94 DOI: 10.1016/j.jimonfin.2013.09.005

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    References listed on IDEAS

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    Cited by:

    1. repec:eee:pacfin:v:46:y:2017:i:pb:p:337-354 is not listed on IDEAS
    2. Dany Bahar & Miguel Angel Santos & Carlos Alberto Molina, 2017. "Fool’s Gold: Currency Devaluations and Stock Prices of Multinational Companies Operating in Venezuela," CID Working Papers 83a, Center for International Development at Harvard University.
    3. Xingwang Qian & Andreas Steiner, 2014. "International Reserves and the Composition of Foreign Equity Investment," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 379-409, May.
    4. repec:bla:jfnres:v:40:y:2017:i:2:p:223-248 is not listed on IDEAS
    5. Du, Ding & Hu, Ou & Wu, Hong, 2014. "Emerging market currency exposure: Taiwan," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 47-61.

    More about this item


    Currency devaluation; Stock market response; Macroeconomic factors;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets


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