Exchange Rate Risk and the Equity Performance of Financial Intermediaries: Evidence from an International Sample

26 Pages Posted: 15 Dec 2011 Last revised: 9 Sep 2013

See all articles by Dimitrios Gounopoulos

Dimitrios Gounopoulos

University of Bath

Philip Molyneux

University of Sharjah - College of Business Administration

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

John O. S. Wilson

University of St. Andrews

Zhao Gang

City University London - Sir John Cass Business School

Date Written: February 3, 2012

Abstract

This study uses the VAR-BEKK methodology to examine the relationship between equity returns and currency exposure for a sample of U.S., U.K. and Japanese banks and insurance firms during 2003-2011. The findings indicate that banks’ equity returns are negatively related to changes in foreign currency value during the recent financial crisis (2008-2011). That is, the U.S. (Japanese) banking sector is negatively correlated to changes in the Japanese Yen (U.S. dollar). Looking at the insurance sector, the U.S./U.K. insurers are negatively linked to changes in the value of Japanese Yen, and this relationship is accentuated during the crisis. Home currency exposure is not significant for any insurer. When size is taken into account, only small U.S. banks are exposed to home currency changes, while only large Japanese banks are exposed to foreign currency changes. Overall, the negative relationship between the foreign currency value and bank/insurance equity returns supports the “flight to quality” hypothesis from the U.S./U.K. to Japan.

JEL Classification: C22, C50, G10, G14

Suggested Citation

Gounopoulos, Dimitrios and Molyneux, Philip and Staikouras, Sotiris and Wilson, John O. S. and Gang, Zhao, Exchange Rate Risk and the Equity Performance of Financial Intermediaries: Evidence from an International Sample (February 3, 2012). International Review of Financial Analysis, 29 (2013) 271–282. Available at SSRN: https://ssrn.com/abstract=1971540

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Philip Molyneux

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

Sotiris Staikouras

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

John O. S. Wilson

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

Zhao Gang

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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