Effect of exchange rate movements on stock market returns volatility : evidence from developed countries during period 2001-2016

Abstract EN

The dynamic links between exchange rate fluctuations and stock market return volatility is empirically investigated in this paper, by adopting a Generalized Autoregressive Conditional Heteroscedasticity model (GARCH model).The data consist of daily closing stock market indexes denominated in local currency and exchange rates for three developed countries, namely United Kingdom (UK), Japan and Canada.

To study this relationship during bad and good times we choose data from January 2001 to September 2016 (3443 observations).

Stock market returns sensitivities are found to be stronger for exchange rates, implying that exchange rate change plays an important role in determining the dynamics of the stock market returns during this period.