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Exchange rate volatility and the stability of stock prices

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  • Blau, Benjamin M.

Abstract

Using a sample of American Depositary Receipts (ADRs), we test whether the volatility of ADRs is explained by exchange-rate volatility in the ADR home country. Tests show that variability in the home-country currency leads to greater volatility in ADRs as a 1% increase in exchange-rate volatility corresponds to an approximate 2% increase in ADR volatility. To make stronger causal inferences, we show abnormal volatility in Chinese ADRs surrounding the largely unexpected 2005 unpegging of the Chinese Yuan to the U.S. dollar. These results provide an important link between currency markets and equity markets.

Suggested Citation

  • Blau, Benjamin M., 2018. "Exchange rate volatility and the stability of stock prices," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 299-311.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:299-311
    DOI: 10.1016/j.iref.2018.04.002
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    More about this item

    Keywords

    Foreign exchange; Exchange-rate volatility; Stock markets; American Depositary Receipts; Stock price volatility;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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