Nonlinear Links between Stock Returns and Exchange Rate Movements

Daniel Hartmann and Christian Pierdzioch

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Stock returns; exchange rate movements; nonlinearities (search for similar items in EconPapers)
JEL-codes: F37 C53 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-ifn, nep-mac and nep-rmg
Date: 2006-09
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http://mpra.ub.uni-muenchen.de/558/ orginal version
http://mpra.ub.uni-muenchen.de/2918/ revised version

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