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Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation

Author

Listed:
  • Vincent BODART

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Paul REDING

    (Department of Economics, University of Namur, Belgium)

Abstract

In this paper, we develop a bivariate two factor-two country GARCH model of stock returns in order to investigate whether exchange rate fluctuations have a significant impact on the conditional mean, variance, and correlation of industry stock returns. Weekly data for seven industries in five European countries over the 1990-1998 period are used. We document that exchange rates have a significant effect on expected industry stock returns and on their volatility. The magnitude of this effect is, however, quite small. The contribution of the exchange rate factor to the time-varying correlation coefficients between two countries’industry returns is also very modest. The paper also shows that the importance of the exchange rate spillovers is influenced by the exchange rate regime, the magnitude and the direction of exchange rate shocks.

Suggested Citation

  • Vincent BODART & Paul REDING, 2001. "Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation," LIDAM Discussion Papers IRES 2001016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2001016
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2001-16.pdf
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    References listed on IDEAS

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    Cited by:

    1. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    2. Arfaoui, Mongi & Ben Rejeb, Aymen, 2015. "Return dynamics and volatility spillovers between FOREX and MENA stock markets: what to remember for portfolio choice?," MPRA Paper 61520, University Library of Munich, Germany.
    3. Bin, Feng-Shun & Morris, Gay B. & Chen, Dar-Hsin, 2003. "Effects of exchange-rate and interest-rate risk on ADR pricing behavior," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 241-262, August.
    4. Arfaoui Mongi & Ben Rejeb Aymen, 2015. "Return Dynamics and Volatility Spillovers Between FOREX and Stock Markets in MENA Countries: What to Remember for Portfolio Choice?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 46(1), pages 72-100, June.
    5. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, University Library of Munich, Germany.

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    More about this item

    Keywords

    Industry stock returns; Fx market; Volatility; International correlation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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