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Idiosyncratic volatility, economic fundamentals, and foreign exchange rates

Hui Guo () and Robert Savickas

No 2005-025, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample tests, even after we use a bootstrap procedure to explicitly account for data mining. We also document a positive and significant relation between a country?s idiosyncratic volatility and the future U.S. dollar price of its currency?in France, Germany, and Japan. Moreover, among a number of commonly used financial variables, only idiosyncratic volatility forecasts output growth in both U.S. and foreign countries. Our results suggest that there might be a close link between exchange rates and economic fundamentals. ; Earlier title: Foreign exchange rates don't follow a random walk

Keywords: Foreign exchange; International finance (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-fmk and nep-ifn
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