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Asymmetric Exchange Rate Exposure of Stock Returns: Empirical Evidence from Chinese Industries

Author

Listed:
  • Cuestas, Juan Carlos

    () (Department of Economics, University of Sheffield)

  • Tang, Bo

    () (Department of Economics, University of Sheffield)

Abstract

This study explores the asymmetric exchange rate exposure of stock returns building upon the capital asset pricing model (CAPM) framework, using monthly returns of Chinese industry indices. In accordance with the existing literature, industry returns are subject to lagged exposure effects, but the asymmetries vary across industries, which could be due to the discrepancies of trade balance and ownership of certain industries. Furthermore, the dynamic multipliers depict that industry returns quickly respond to changes in the exchange rate and correct the disequilibrium within a short time, making the long run exposure to be symmetric or very small. The remaining shocks are mainly explained by the return of market portfolios. This implies that the ongoing restrictions on the RMB daily trading band do indeed protect the Chinese stock market against the effects of currency movements.

Suggested Citation

  • Cuestas, Juan Carlos & Tang, Bo, 2016. "Asymmetric Exchange Rate Exposure of Stock Returns: Empirical Evidence from Chinese Industries," RIEI Working Papers 2016-03, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.
  • Handle: RePEc:xjt:rieiwp:2016-03
    as

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    File URL: http://58.210.89.21/RePEc/xjt/working-papers/RIEI-WP_2016-03.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
    1. Bo Tang, 2015. "Exchange Rate Exposure of Chinese Firms at the Industry and Firm Level," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 592-607, August.
    2. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, vol. 12(3), pages 272-292, September.
    3. Wei, Yi-Ming & Liao, Hua & Fan, Ying, 2007. "An empirical analysis of energy efficiency in China's iron and steel sector," Energy, Elsevier, vol. 32(12), pages 2262-2270.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Afees A. Salisu, 2018. "United we stand, divided we fall: A PANICCA test evidence for stock exchanges in OECD," Working Papers 049, Centre for Econometric and Allied Research, University of Ibadan.
    2. Juan Carlos Cuestas & Ying Sophie Huang & Bo Tang, 2016. "Does the Yuan's Overseas Expansion Increase the Currency Exposure of Chinese Financial Firms?," Working Papers 2016006, The University of Sheffield, Department of Economics.
    3. Lateef O. Akanni & Kazeem Isah, 2018. "Exchange Rate Movements on Sectoral Stock Prices of Nigerian Firms: Is there Evidence of Asymmetry?," Working Papers 046, Centre for Econometric and Allied Research, University of Ibadan.
    4. Bahmani-Oskooee, Mohsen & Saha, Sujata, 2016. "Do exchange rate changes have symmetric or asymmetric effects on stock prices?," Global Finance Journal, Elsevier, vol. 31(C), pages 57-72.
    5. repec:eee:finana:v:56:y:2018:i:c:p:253-263 is not listed on IDEAS
    6. Tang, Bo, 2018. "Does the currency exposure affect stock returns of Chinese automobile firms?," MPRA Paper 85125, University Library of Munich, Germany.
    7. Siew-Pong Cheah & Thian-Hee Yiew & Cheong-Fatt Ng, 2017. "A nonlinear ARDL analysis on the relation between stock price and exchange rate in Malaysia," Economics Bulletin, AccessEcon, vol. 37(1), pages 336-346.
    8. repec:fis:journl:180105 is not listed on IDEAS

    More about this item

    Keywords

    Asymmetric exchange rate exposure; stock returns; Chinese industries; NARDL;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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