Exchange Rate Risk in the U.S. Stock Market: A Pooled Panel Data Regression Approach

40 Pages Posted: 25 Jun 2019

See all articles by Cheng-Few Lee

Cheng-Few Lee

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

Cindy S.H. Wang

National Tsing Hua University - College of Technology Management; Catholic University of Louvain (UCL)

Andrew Y.M. Xie

affiliation not provided to SSRN

Date Written: Dec 21, 2018

Abstract

This paper focuses on revisiting an old issue by advanced econometrics analysis: the risks in the U.S. stock market. We analyze the firm's exposure to exchange rate, interest rate, and market shocks by the pooled regression with the error cross-section dependency. We not only examine the exchange market, and interest rate exposure to U.S. firm values in 396 samples, but we also investigate those patterns to the firms within each of the 10 specific industries by which way we may detect the direction of capital flows before and after two well-known financial crises that occurred in 2001 and 2008. All empirical results show the significant industry-specific sensitivity to these three risks which are in marked contrast to the findings that have been assessed thus far in current literature. Our results indicate: (i) in which industry the capital flows go (industry-specific effect) before and after crises; (ii) which currency, market index, and interest rate play a more important role in the sensitivity to U.S. firm stock returns before and after crises; and (iii) the prospect on hedging portfolio setting for investors before and after crises, which is consistent with the finding of Campbell {it et al.} (2010) and Lusting {it et al.} (2011).

Keywords: Panel data analysis, Error cross-sectional dependency, Exchange rate exposure, Capital flows, Common factors, Risk management

JEL Classification: C23, F31, G11

Suggested Citation

Lee, Cheng-Few and Wang, Cindy S.H. and Xie, Andrew Y.M., Exchange Rate Risk in the U.S. Stock Market: A Pooled Panel Data Regression Approach (Dec 21, 2018). Available at SSRN: https://ssrn.com/abstract=3407704 or http://dx.doi.org/10.2139/ssrn.3407704

Cheng-Few Lee

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

111 Washington Avenue
Newark, NJ 07102
United States
732-445-3907 (Phone)
732-445-5927 (Fax)

Cindy S.H. Wang (Contact Author)

National Tsing Hua University - College of Technology Management ( email )

101, Section 2 Kuang Fu Road
Hsinchu, Taiwan 300
China

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Andrew Y.M. Xie

affiliation not provided to SSRN

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