Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates

In this paper we investigate the return relations between major asset classes using data from both the US and the UK. Our first objective is to examine time variation in conditional correlations to determine when these variables act as a hedge against each other. Secondly, we provide evidence on whether the dependencies between the asset classes differ during extreme price movements by using quantile regressions. This analysis provides evidence on whether these asset classes can be considered as safe havens for each other. A noteworthy finding of our study is that gold can be regarded as a safe haven against exchange rates in both countries, highlighting its monetary asset role

Hedges and Safe Havens: An Examination of Stocks, Bonds, Gold, Oil and Exchange Rates

It is widely accepted that, for some industries, competition across countries is" economically important and that this competition is strongly affected by exchange rate changes." This paper explores the validity of this view using weekly stock return data on 320 industry pairs" in six countries from 1975 to 1997. It is found that common shocks to industries across countries" are more important than competitive shocks. Weekly exchange rate shocks explain almost" nothing of the relative performance of industries. Using returns measured over longer horizons the importance of exchange rate shocks increases slightly and the importance of common shocks" to industries increases more substantially. Both industry and exchange rate shocks are more" important for industries that produce goods traded internationally, but the importance of these" shocks is economically small for these industries as well.

International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns

We study the long-run and short-run dynamics between stock prices and exchange rates and the channels through which exogenous shocks impact on these markets. We apply the analysis to a group of Pacific Basin countries and examine whether foreign exchange controls and the Asian financial crisis of mid 1997 affected the links between the markets. The evidence shows that the US stock market acts as a conduit through which the foreign exchange market and the local stock markets are linked. It also provides support for a close relationship between financial and economic integration. Finally, the evidence shows that the financial crisis had a temporary effect on the long-run comovement between the various markets.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID251296_code199490.pdf?abstractid=251296&rulid=96964&mirid=2

Stock Prices and Exchange Rate Dynamics

This article systematically examines the importance of exchange rate movements and industry competition for stock returns. Common shocks to industries across countries are more important than competitive shocks due to changes in exchange rates. Weekly exchange rate shocks explain almost nothing of the relative performance of industries. Using returns measured over longer horizons, the importance of exchange rate shocks increases slightly and the importance of industry common shocks increases more substantially. Both industry and exchange rate shocks are more important for industries that produce internationally traded goods, but the importance of these shocks is economically small for these industries as well. Economists, journalists, and politicians around the world argue that some of the industries in their country compete vigorously with the same industries in other countries and that exchange rate shocks affect their competitiveness. In the United States it is routinely stated that some U.S. industries compete with Japanese industries and that a depreciation of the yen is bad for these U.S. industries and good for the rival Japanese industries: “If the yen falls, trade tensions could intensify between the U.S. and Japan as autos and machinery from Japan gain a competitive edge.” 1 Further, the exchange rate literature shows that exchange rate shocks lead to persistent deviations from purchasing power parity. 2 Froot and Klemperer (1989) and Knetter (1989, 1993), among others, demonstrate that deviations from purchasing power parity lead to sharp changes in price markups and profit margins for exporters.

/pdf/international-competition-and-exchange-rate-shocks-a-cross-126o4e25re.pdf

Real exchange-rate changes affect bonds differently from stocks. Bonds, having relatively fixed income streams, reflect only an interest-rate effect; stocks reflect a conjunction of interest-rate and cash-flow effects. If exchange rate changes contain information about future interest rates and cash flows over more than one period, then using short horizons may not fully capture exchange exposure, which may explain why prior empirical studies have failed to find an association between stock returns and exchange rates. Using long-horizon returns and long-horizon exchange-rate changes as the authors do provides a clearer picture of exchange exposure. Copyright 1997 by University of Chicago Press.

The Exchange-Rate Risk Exposure of Asset Returns

Diversification and time: Do investment horizons matter?

Real exchange rate changes affect bonds differently from stocks. Bonds, having relatively fixed income streams, reflect only an interest rate effect, while stocks reflect a conjunction of interest rate and cash flow effects. If exchange rate changes contain information about future interest rates and cash flows over more than one period, then using short horizons may not fully capture exchange exposure and may explain why prior empirical studies have failed to find an association between stock returns and exchange rates. Using long-horizon returns and long-horizon exchange rate changes as we do provides a clearer picture of exchange exposure.

The Exchange Rate Risk Exposure of Asset Returns

T he above quotation was made recently by Dan Dorfman, a noted columnist, and is indicative of the significance that Wall Street analysts attach to the aggregate trading activity of insiders.’ Substantial research suggests that access to private information can indeed enable corporate insiders to outperform the market by trading in their own firm’s stock. Insiders tend to buy stock at depressed levels and sell stock at elevated levels. If so, is it not logical to conclude that the trading behavior of insiders in the aggregate should predict the future near-term direction of the market? Perhaps provided corporate insiders do not commit serious errors of judgment. But suppose that stock prices subsequently rise or fall regardless of whether in the aggregate insiders buy or sell? If that is the case, a market timer using aggregate insider trading could suffer significant losses if stock prices

Wayne Y. Lee

Papers

The Exchange-Rate Risk Exposure of Asset Returns

Diversification and time: Do investment horizons matter?

The Exchange Rate Risk Exposure of Asset Returns

Insider trading: A poor guide to market timing