Explaining Exchange Rate Risk in World Stock Markets: A Panel Approach

Posted: 6 Oct 2002

See all articles by Dilip K. Patro

Dilip K. Patro

OCC

John K. Wald

University of Texas at San Antonio

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Abstract

Using a GARCH approach, we estimate a time-varying two-factor international asset pricing model for weekly equity index returns of 16 OECD countries. A trade-weighted basket of exchange rates and the MSCI world market index are used as risk factors. We find significant currency risk exposures in country equity index returns. We then explain these currency betas using several country-specific macroeconomic variables with a panel approach. We find that imports, exports, credit ratings, and tax revenues significantly affect currency risks in a way that is consistent with some economic hypotheses. Similar conclusions are obtained by using lagged explanatory variables, and thus these macroeconomic variables may be useful as predictors of currency risk exposures. Our results are robust to a number of alternative specifications.

Keywords: Foreign exchange exposure, Determinants of currency risk, Panel estimation

JEL Classification: G15, F31

Suggested Citation

Patro, Dilip K. and Wald, John K. and Wu, Yangru, Explaining Exchange Rate Risk in World Stock Markets: A Panel Approach. Available at SSRN: https://ssrn.com/abstract=327920

Dilip K. Patro (Contact Author)

OCC ( email )

400 7th Street SW
Washington, DC 20219
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202-649-5548 (Phone)

John K. Wald

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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