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Dollar beta and stock returns

Author

Listed:
  • Valentina Bruno
  • Ilhyock Shim
  • Hyun Song Shin

Abstract

The financial channel of exchange rates operates through changes in risk-taking by investors and is reflected in the response of financial conditions to exchange rate movements. We show that stock returns also reflect the financial channel of exchange rates, with higher local currency stock returns associated with a weaker dollar. The broad dollar index emerges as a global factor, consistent with the financial channel operating through swings in risk-taking by global investors. We introduce the "dollar beta" as the sensitivity of stock returns to swings in the broad dollar index, and show that emerging market stock indices that have a higher dollar beta tend to have higher average returns, implying that the dollar beta is a cross-section risk factor that is priced.

Suggested Citation

  • Valentina Bruno & Ilhyock Shim & Hyun Song Shin, 2022. "Dollar beta and stock returns," BIS Working Papers 1000, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1000
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    References listed on IDEAS

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    4. Adrien Verdelhan, 2018. "The Share of Systematic Variation in Bilateral Exchange Rates," Journal of Finance, American Finance Association, vol. 73(1), pages 375-418, February.
    5. Valentina Bruno & Hyun Song Shin, 2017. "Global Dollar Credit and Carry Trades: A Firm-Level Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 703-749.
    6. Valentina Bruno & Hyun Song Shin, 2015. "Cross-Border Banking and Global Liquidity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(2), pages 535-564.
    7. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    Cited by:

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    3. Ahmed, Walid M.A. & Sleem, Mohamed A.E., 2023. "Short- and long-run determinants of the price behavior of US clean energy stocks: A dynamic ARDL simulations approach," Energy Economics, Elsevier, vol. 124(C).
    4. Pham, Son Duy & Nguyen, Thao Thac Thanh & Do, Hung Xuan, 2023. "Natural gas and the utility sector nexus in the U.S.: Quantile connectedness and portfolio implications," Energy Economics, Elsevier, vol. 120(C).
    5. Bertaut, Carol & Bruno, Valentina & Shin, Hyun Song, 2024. "Original Sin Redux: Role of Duration Risk," CEPR Discussion Papers 18757, C.E.P.R. Discussion Papers.
    6. Asadi, Mehrad & Pham, Son D. & Nguyen, Thao T.T. & Do, Hung Xuan & Brooks, Robert, 2023. "The nexus between oil and airline stock returns: Does time frequency matter?," Energy Economics, Elsevier, vol. 117(C).
    7. Carol Bertaut & Valentina Bruno & Hyun Song Shin, 2023. "Original sin redux: role of duration risk," BIS Working Papers 1109, Bank for International Settlements.
    8. Bruno Bonizzi & Annina Kaltenbrunner, 2024. "International financial subordination in the age of asset manager capitalism," Environment and Planning A, , vol. 56(2), pages 603-626, March.

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    More about this item

    Keywords

    global liquidity; pricing factor; emerging market; exchange rate.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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