This study investigates the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy and the UK. In addition to exposure to the market, significant levels of exposure to both exchange rate risk, in the four countries, and interest rate risk, in France and Germany, are identified. Further, responses to sources of risk are decomposed into components attributable to news about future dividends, real interest rates and excess returns. All three sources of risk contain significant information about future cash flows and excess returns.

The response of industry stock returns to market, exchange rate and interest rate risks

This research empirically examines the connection between stock market performance, exchange rates and interest rates using the VECM model and monthly time series data. During the pre hyperinflationary phase findings showed that the impact of interest rates on stock market performance were mixed. Stock market performance converged to long run equilibrium with bank rates (1.4%) within 8 months. Unidirectional causality moves from stock market to exchange rates, Treasury bill rates and deposit rates. Bank rates granger causes stock market performance. In hyperinflationary period exchange rate and deposit rates had a positive impact on stock market performance while Treasury bills had a negative effect. In long term the convergence to equilibrium with stock market performance was at rates of 1.3%, 1.5% and 1.8% for exchange rates, Treasury bills and deposit rates respectively. Causality between stock market and exchange rates was bidirectional while unidirectional causality moved from stock market performance to interest rates. Sound exchange rates and treasury bills policies in the long term help stabilize the stock market. Mismanagement of exchange rates and interest rates by monetary authorities will destabilize the stock market. Changes in exchange rates and bank rates are important to investors in the short term.

Stock Market Performance, Interest Rate and Exchange Rate Interactions in Zimbabwe: A Cointegration Approach

Exchange rate plays vital role in an economy and thus has gained much attention in the literature. The purpose of the study is to test the portfolio balance approach which proposes that money supply and bonds of a country impact its exchange rate. For this purpose, Augmented Dickey Fuller and Phillips Perron test have been applied on the quarterly data from 2001 to 2010 to test the stationarity of the data. Auto regressive distributed lag model has been used to analyze the data. Results validate the empirical evidence and reveal that long term relationship is found among the variables. Money supply of US, money supply of Pakistan and bonds for US are having an impact on the exchange rate of these countries.

	 

	Key words: Portfolio balance approach, exchange rate, money supply, bonds, balance of payments.

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Portfolio balance approach: An empirical testing

Changes in the exchange system in the past decade have caused the concept of the exchange rate became as a key factor, especially in developing countries. The reason of these changes being highly important is their effect on the value of the national currency. Changes in the value of the national currency while being affected by domestic economic policies of each country are also under influence of any economic and political events in the international arena. By considering the necessity of the relation between stock markets and exchange markets, numerous studies have been conducted in recent years, each of them using a specific method to examine these relations. One of the most important variables in the exchange market rate is the uncertainty. Uncertainty in exchange rate fluctuations will create a sense of uncertainty toward market conditions, so that the lack of confidence can have a significant effect on the activity in the stock market. Hence in regard to the importance of knowing the degree of uncertainty in exchange rate in the present study first we employed EGARCH model to estimate the extent of this variable, and then we entered the variables of the proposed model as independent variables influencing Index Tehran Stock Exchange, including GDP , real exchange rate, real exchange rate uncertainty, actual cash and investment in the housing sector. According to the conducted investigation, the majority of pattern variable was abnormal, so we used the GMM estimator to estimate the Tehran Stock Exchange. The result of this assessment established that the effect of all variables except GDP on the Tehran Stock Index was negative. Consequently, the exchange rate uncertainty like other variables on the stock index of Tehran Stock Exchange has a negative and meaningful effect and is in accordance consistent with our expectations with respect to our current situation.

Marjan Damankeshideh

Papers

Impact of Real Exchange Rate Uncertainty on the Stock Index of Tehran Stock Exchange