Idiosyncratic Volatility, Economic Fundamentals, and Foreign Exchange Rates

FRB of St. Louis Working Paper No. 2005-025B

53 Pages Posted: 17 May 2006

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: May 2006

Abstract

This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample tests, even after we use a bootstrap procedure to explicitly account for data mining. We also document a positive and significant relation between a country's idiosyncratic volatility and the future U.S. dollar price of its currency - in France, Germany, and Japan. Moreover, among a number of commonly used financial variables, only idiosyncratic volatility forecasts output growth in both U.S. and foreign countries. Our results suggest that there might be a close link between exchange rates and economic fundamentals.

Keywords: exchange rate predictability, average idiosyncratic volatility, monetary model, bootstrap, data mining

JEL Classification: F31, G1

Suggested Citation

Guo, Hui and Savickas, Robert, Idiosyncratic Volatility, Economic Fundamentals, and Foreign Exchange Rates (May 2006). FRB of St. Louis Working Paper No. 2005-025B, Available at SSRN: https://ssrn.com/abstract=902410 or http://dx.doi.org/10.2139/ssrn.902410

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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