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The Effects of Exchange-Rate Exposures on Equity Asset Markets

Adusei Jumah () and Robert Kunst ()

No 94, Economics Series from Institute for Advanced Studies

Abstract: This paper analyzes the relationship between stock returns and exchange rate changes in international markets and examines how well exchange rate volatility explains movements in stock market returns. The model-based predictions are evaluated on several cost functions. Results from such analysis can be used to appraise the need for hedging. Of the three examined stock indexes, the FTSE was found to be the only robust index, while the S&P 500 and the Nikkei indexes reacted to the dollar/yen exchange rates. The dollaer/yen rate also improved risk prediction for the Standard&Poor futures, while the gains in forecasting from using bivariate models remained small otherwise.

Keywords: Exchange rate futures; Index futures; Conditional heteroskedasticity; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 G15 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2001-01
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