Dynamic Relations between Stock Returns and Exchange Rate Changes

36 Pages Posted: 12 Dec 2013

See all articles by A. Can Inci

A. Can Inci

Bryant University

Bong-Soo Lee

Florida State University

Date Written: January 2014

Abstract

We re‐examine the relation between stock returns and exchange rate changes in five major European countries (France, Germany, Italy, Switzerland, and the UK), the USA, Canada, and Japan by taking into account dynamic effects, including lagged changes of variables, and employing causal relations. We find that lagged exchange rates have a significant impact on stock returns. We find evidence of Granger causality from exchange rate changes to stock returns, and also for the reverse direction. Furthermore, the dynamic relation has been more significant and stronger in recent years and recession periods than in early periods and expansion periods.

Keywords: exchange rate exposure, Granger causality, forward premium puzzle

Suggested Citation

Inci, Ahmet Can and Lee, Bong-Soo, Dynamic Relations between Stock Returns and Exchange Rate Changes (January 2014). European Financial Management, Vol. 20, Issue 1, pp. 71-106, 2014, Available at SSRN: https://ssrn.com/abstract=2366593 or http://dx.doi.org/10.1111/j.1468-036X.2011.00621.x

Ahmet Can Inci (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

Bong-Soo Lee

Florida State University ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-4713 (Phone)

HOME PAGE: http://www.cob.fsu.edu/fin/display_faculty_info.cfm?pID=401

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