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Idiosyncratic volatility, economic fundamentals, and foreign exchange rates

Listed author(s):
  • Hui Guo
  • Robert Savickas
Registered author(s):

This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample tests, even after we use a bootstrap procedure to explicitly account for data mining. We also document a positive and significant relation between a country’s idiosyncratic volatility and the future U.S. dollar price of its currency—in France, Germany, and Japan. Moreover, among a number of commonly used financial variables, only idiosyncratic volatility forecasts output growth in both U.S. and foreign countries. Our results suggest that there might be a close link between exchange rates and economic fundamentals. ; Earlier title: Foreign exchange rates don't follow a random walk

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-025.

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Date of creation: 2006
Handle: RePEc:fip:fedlwp:2005-025
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