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Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries

Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries AbstractThis study explores the asymmetric exchange rate exposure of stock returns building upon the capital asset pricing model (CAPM) framework, using monthly returns of Chinese industry indices. We are interested in estimating long run and short run relationships as well as asymmetric effects. In order to do so, we estimate nonlinear autoregressive distributed lags models to (1) obtain the long run or cointegrated effects and dynamics, (2) be able to mix I(1) and I(0) variables and (3) to split the effect of positive and negative changes in the variables, i.e. asymmetries. In accordance with the existing literature, industry returns are subject to lagged exposure effects, but the asymmetries vary across industries, which could be due to the discrepancies in, amongst others, trade balance and ownership of certain industries. Furthermore, the dynamic multipliers depict that industry returns quickly respond to changes in the exchange rate and correct the disequilibrium within a short time, making the long run exposure to be symmetric or very small. The remaining shocks are mainly explained by the return of market portfolios. This implies that the ongoing restrictions on the RMB daily trading band do indeed protect the Chinese stock market against the effects of currency movements. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries

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References (52)

Publisher
de Gruyter
Copyright
©2017 Walter de Gruyter GmbH, Berlin/Boston
ISSN
1558-3708
eISSN
1558-3708
DOI
10.1515/snde-2016-0042
Publisher site
See Article on Publisher Site

Abstract

AbstractThis study explores the asymmetric exchange rate exposure of stock returns building upon the capital asset pricing model (CAPM) framework, using monthly returns of Chinese industry indices. We are interested in estimating long run and short run relationships as well as asymmetric effects. In order to do so, we estimate nonlinear autoregressive distributed lags models to (1) obtain the long run or cointegrated effects and dynamics, (2) be able to mix I(1) and I(0) variables and (3) to split the effect of positive and negative changes in the variables, i.e. asymmetries. In accordance with the existing literature, industry returns are subject to lagged exposure effects, but the asymmetries vary across industries, which could be due to the discrepancies in, amongst others, trade balance and ownership of certain industries. Furthermore, the dynamic multipliers depict that industry returns quickly respond to changes in the exchange rate and correct the disequilibrium within a short time, making the long run exposure to be symmetric or very small. The remaining shocks are mainly explained by the return of market portfolios. This implies that the ongoing restrictions on the RMB daily trading band do indeed protect the Chinese stock market against the effects of currency movements.

Journal

Studies in Nonlinear Dynamics & Econometricsde Gruyter

Published: Jul 25, 2017

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