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Nonlinear Links between Stock Returns and Exchange Rate Movements

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  • Hartmann, Daniel
  • Pierdzioch, Christian

Abstract

Empirical evidence suggests that the link between exchange rate movements and stock returns may be nonlinear. This evidence could reflect fundamental economic effects like, for example, transaction costs in international goods market arbitrage. It could also reflect market inefficiencies if investors could exploit the nonlinearity to systematically improve the performance of simple trading rules. Using monthly data for major North-American and European industrial countries for the period 1973-2006, we found that it would have been difficult for an investor to use information on nonlinearities to improve the performance of a simple trading rule based on out-of-sample forecasts of stock returns.

Suggested Citation

  • Hartmann, Daniel & Pierdzioch, Christian, 2006. "Nonlinear Links between Stock Returns and Exchange Rate Movements," MPRA Paper 558, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:558
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    References listed on IDEAS

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    Cited by:

    1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "Some thoughts on accurate characterization of stock market indexes trends in conditions of nonlinear capital flows during electronic trading at stock exchanges in global capital markets," MPRA Paper 49921, University Library of Munich, Germany.

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    More about this item

    Keywords

    Stock returns; exchange rate movements; nonlinearities;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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