Nonlinear Links between Stock Returns and Exchange Rate Movements

Hartmann, Daniel and Pierdzioch, Christian (2006): Nonlinear Links between Stock Returns and Exchange Rate Movements.

Abstract

Empirical evidence suggests that the link between exchange rate movements and stock returns may be nonlinear. This evidence could reflect fundamental economic effects like, for example, transaction costs in international goods market arbitrage. It could also reflect market inefficiencies if investors could exploit the nonlinearity to systematically improve the performance of simple trading rules. Using monthly data for major North-American and European industrial countries for the period 1973-2006, we found that it would have been difficult for an investor to use information on nonlinearities to improve the performance of a simple trading rule based on out-of-sample forecasts of stock returns.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock returns; exchange rate movements; nonlinearities
• Subjects: F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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