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Exchange rate volatility and the stability of stock prices

Benjamin Blau ()

International Review of Economics & Finance, 2018, vol. 58, issue C, 299-311

Abstract: Using a sample of American Depositary Receipts (ADRs), we test whether the volatility of ADRs is explained by exchange-rate volatility in the ADR home country. Tests show that variability in the home-country currency leads to greater volatility in ADRs as a 1% increase in exchange-rate volatility corresponds to an approximate 2% increase in ADR volatility. To make stronger causal inferences, we show abnormal volatility in Chinese ADRs surrounding the largely unexpected 2005 unpegging of the Chinese Yuan to the U.S. dollar. These results provide an important link between currency markets and equity markets.

Keywords: Foreign exchange; Exchange-rate volatility; Stock markets; American Depositary Receipts; Stock price volatility (search for similar items in EconPapers)
JEL-codes: F3 G10 G14 G15 (search for similar items in EconPapers)
Date: 2018
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