International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns

Abstract

It is widely accepted that, for some industries, competition across countries is economically important and that this competition is strongly affected by exchange rate changes. This paper explores the validity of this view using weekly stock return data on 320 industry pairs in six countries from 1975 to 1997. It is found that common shocks to industries across countries are more important than competitive shocks. Weekly exchange rate shocks explain almost nothing of the relative performance of industries. Using returns measured over longer horizons, the importance of exchange rate shocks increases slightly and the importance of common shocks to ndustries increases more substantially. Both industry and exchange rate shocks are more important for industries that produce goods traded internationally, but the importance of these shocks is economically small for these industries as well.

JEL Classification: G12, G15, F31