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Asymmetric Effects of Exchange Rates on Stock Prices in G7 Countries

Author

Listed:
  • Arash Habibi

    (Jönköping International Business School, Jönköping University, Sweden.)

  • Chin Lee

    (Faculty of Economics and Management, Universiti Putra Malaysia, Malaysia.)

Abstract

This paper examines whether there are asymmetric effects of exchange rates on stock prices in G7 countries. According to Fratzscher (2008), the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings. Therefore, it is important to find out the impacts of G7 exchange rate adjustments on the stock markets. These effects can become worldwide as G7 stock markets have been the trading platform for international market capitalization for about last thirty years. A vast body of research documented that a country’s currency can have a large effect on stock market movement, however the empirical findings are mixed. This study contended that exchange rates can affect stock prices asymmetrically. This study systematically discussed four views on how exchange rates can affect stock prices asymmetrically. A dataset consists of 227 monthly data from 31-12-1997 to 31-10-2016 for G7 countries, namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States are collected from Thomson Reuters DataStream and Bank for International Settlements (BIS). A nonlinear ARDL model is employed to analyze the asymmetric effects of exchange rates on stock prices. The findings showed that the exchange rate changes in all G7 countries have short-run asymmetric effects on stock prices. However, the results do not hold into the long-run, except for Germany. This paper suggests that policymakers should have a different reaction in policy decision between the depreciation and appreciation of exchange rates. Investors can make profit from stock market by buying or selling stocks according to the predicted response of stock market to exchange rate changes. Take into consideration of the importance of G7 currencies and stock markets, this paper examined and compared the asymmetric effects of exchange rates on stock prices in G7 countries.

Suggested Citation

  • Arash Habibi & Chin Lee, 2019. "Asymmetric Effects of Exchange Rates on Stock Prices in G7 Countries," Capital Markets Review, Malaysian Finance Association, vol. 27(1), pages 19-33.
    • Handle: RePEc:mfa:journl:v:27:y:2019:i:1:p:19-33
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    2. Baklaci, Hasan Fehmi & Aydoğan, Berna & Yelkenci, Tezer, 2020. "Impact of stock market trading on currency market volatility spillovers," Research in International Business and Finance, Elsevier, vol. 52(C).
    3. Joseph Chukwudi Odionye & Jude Okechukwu Chukwu, 2023. "Asymmetric Reactions Of Stock Prices And Industrial Output To Exchange Rate Shocks: Multiple Threshold Nonlinear Autoregressive Distributed Lag Framework," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 68(237), pages 165-191, April – J.
    4. Omer Ahmed Sayed Mohamed & Faiza Omer Mohammed Elmahgop, 2020. "Is the Effect of the Exchange Rate on Stock Prices Symmetric or Asymmetric? Evidence from Sudan," International Journal of Economics and Financial Issues, Econjournals, vol. 10(2), pages 209-215.

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    More about this item

    Keywords

    Exchange rates; stock prices; nonlinear ARDL; asymmetry.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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