Exchange rate shocks and equity prices: the role of currency denomination

Romain Baeriswyl, Alex Oktay and Marc-Antoine Ramelet

No 2023-05, Working Papers from Swiss National Bank

Abstract: We find that the response of stock prices to the exchange rate reflects a currency denomination effect—that is, a change in the relative international value of firms’ cash flows and equity—rather than a change in domestic economic conditions. To do so, we compute exogenous movements for the Swiss franc on SNB announcement days and trace their effects on Swiss stocks. Exploiting firm heterogeneity reveals that the prices of stocks with foreign-denominated cash flows are considerably more sensitive to the exchange rate. Using the staggered introduction of American Depositary Receipts in Switzerland, we provide causal evidence that cross-listing markedly amplifies the sensitivity of domestic stock prices to exchange rate fluctuations, consistent with the law of one price. Stock market movements that follow central bank announcements should therefore be interpreted with caution because they partially reflect parity movements and not only economic information.

Keywords: International asset pricing; Law of one price; Exchange rate shocks; Cross-listing (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2023
New Economics Papers: this item is included in nep-ifn, nep-inv, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2023-05

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