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Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries

Author

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  • Cuestas Juan Carlos

    (Economics and Research Department, Eesti Pank (Bank of Estonia), Tallinn, Harjumaa, Estonia)

  • Tang Bo

    (Strategic Development Department, Weichai Power Co., Ltd, Weifang, Shandong, China)

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. We are interested in estimating long run and short run relationships as well as asymmetric effects. In order to do so, we estimate nonlinear autoregressive distributed lags models to (1) obtain the long run or cointegrated effects and dynamics, (2) be able to mix I(1) and I(0) variables and (3) to split the effect of positive and negative changes in the variables, i.e. asymmetries. 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 in, amongst others, 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, 2017. "Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(4), pages 1-21, September.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:4:p:21:n:4
    DOI: 10.1515/snde-2016-0042
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    References listed on IDEAS

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    Cited by:

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    2. Afees A. Salisu & Kazeem Isah & Nnenna Ogbonnaya‐Orji, 2022. "A firm level analysis of asymmetric response of U.S. stock returns to exchange rate movements," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1220-1239, January.
    3. Bo Tang, 2019. "Does the currency exposure affect stock returns of Chinese automobile firms?," Empirical Economics, Springer, vol. 57(1), pages 53-77, July.
    4. Salisu, Afees A., 2019. "United we stand, divided we fall: A PANICCA test evidence for stock exchanges in OECD," Finance Research Letters, Elsevier, vol. 28(C), pages 343-347.
    5. 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.
    6. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    7. 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.
    8. Cuestas, Juan Carlos & Huang, Ying Sophie & Tang, Bo, 2018. "Does internationalisation increase exchange rate exposure? -Evidence from Chinese financial firms," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 253-263.
    9. Dhaoui Abderrazak & Chevallier Julien & Ma Feng, 2021. "Identifying asymmetric responses of sectoral equities to oil price shocks in a NARDL model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(2), pages 1-19, April.
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    11. 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.
    12. İbrahim Ethem Güney & Abdullah Kazdal & Doruk Küçüksaraç & Muhammed Hasan Yılmaz, 2021. "Exchange Rate Sensitivity of Firm Value: Evidence from Nonfinancial Firms Listed on Borsa Istanbul," Springer Books, in: Burcu Adıgüzel Mercangöz (ed.), Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics, edition 1, pages 141-165, Springer.
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    More about this item

    Keywords

    asymmetric exchange rate exposure; Chinese industries; NARDL; stock returns;
    All these keywords.

    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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