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

Hyde, Stuart J (2007): The response of industry stock returns to market, exchange rate and interest rate risks. Published in: Managerial Finance , Vol. 33, (2007): pp. 693-709.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate exposure; interest rate risk; stock returns
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Bodnar, G.M. and W.M. Gentry, 1993, Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA, Journal of International Money and Finance, 12, 29-45.

Burmeister, E. and M.B. McElroy, 1988, Joint estimation of factor sensitivities and risk premia for the Arbitrage Pricing Theory, Journal of Finance, 43, 721-735.

Campbell, J.Y., 1991, A variance decomposition for stock returns", Economic Journal, 101, 157-179.

Campbell, J.Y. and J. Mei, 1993, Where do betas come from? Asset price dynamics and the sources of systematic risk, Review of Financial Studies, 6, 567-592.

Campbell, J.Y. and R.J. Shiller, 1988, Stock prices, expected earnings and dividends, Journal of Finance 43, 661-676.

Campbell, J.Y. and R.J. Shiller, 1988, The dividend-price ratio and expectations of future dividends and discount factors, Review of Financial Studies 1, 195-228.

Choi, J.J. and E. Elyasiani, 1997, Derivative exposure and the interest rate and exchange rate risks of U.S. banks, Journal of Financial Services Research, 12, 267-286.

Choi, J.J., E. Elyasiani and K.J. Kopecky, 1992, The sensitivity of bank stock returns to market, interest and exchange risks, Journal of Banking and Finance, 16, 983-1004.

Choi, J.J. and A.M. Prasad, 1995, Exchange risk sensitivity and its determinants: A firm and industry analysis of U.S. multinationals, Financial Management, 24, 77-88.

Cuthbertson, K., S. Hayes and S. Hyde, 1998, The industry response to macroeconomic shocks in the UK, Germany and France and the convergence debate, The Economic and Social Review, 29, 383-401.

El-Masry, A.A., 2004, The exchange rate exposure of UK nonfinancial companies: Industry-level analysis, unpublished paper, University of Plymouth.

He, J. and L.K. Ng, 1998, The foreign exchange exposure of Japanese multinational corporations, Journal of Finance, 53, 733-753.

Joseph, N., 2002, Modelling the impacts of interest rate and exchange rate changes on UK stock returns, Derivatives Use, Trading & Regulation, 7, 306-323.

Jorion, P., 1990, The exchange rate exposure of U.S. multinationals, Journal of Business, 63, 331-346.

Jorion, P., 1991, The pricing of exchange rate risk in the stock market, Journal of Financial and Quantitative Analysis, 26, 363-376.

Khoo, A., 1994, Estimation of foreign exchange exposure: An application to mining companies in Australia, Journal of International Money and Finance, 13, 342-363.

Kiymaz, H., 2003, Estimation of foreign exchange exposure: an emerging market application, Journal of Multinational Financial Management, 13, 71-84.

Nydahl, S., 1999, Exchange rate exposure, foreign involvement and currency hedging of firms: Some Swedish evidence", European Financial Management, 5, 241-257.