Do Exchange Rate Changes Have Symmetric or Asymmetric Effects on Stock Prices?

117 Pages·2017·2.27 MB·English

University of Wisconsin Milwaukee
UWM Digital Commons
Theses and Dissertations
May 2017
Do Exchange Rate Changes Have Symmetric or
Asymmetric Effects on Stock Prices?
Sujata Saha
University of Wisconsin-Milwaukee
Follow this and additional works at:https://dc.uwm.edu/etd
Part of theEconomics Commons
Recommended Citation
Saha, Sujata, "Do Exchange Rate Changes Have Symmetric or Asymmetric Effects on Stock Prices?" (2017).Theses and Dissertations.
1535.
https://dc.uwm.edu/etd/1535
This Dissertation is brought to you for free and open access by UWM Digital Commons. It has been accepted for inclusion in Theses and Dissertations
by an authorized administrator of UWM Digital Commons. For more information, please [email protected].
DO EXCHANGE RATE CHANGES HAVE SYMMETRIC OR ASYMMETRIC EFFECTS ON
STOCK PRICES?

by

Sujata Saha

A Dissertation Submitted in
Partial Fulfilment of the
Requirements for the Degree of

Doctor of Philosophy
in Economics

at
The University of Wisconsin-Milwaukee
May 2017
ABSTRACT

DO EXCHANGE RATE CHANGES HAVE SYMMETRIC OR ASYMMETRIC EFFECTS ON
STOCK PRICES?

by
Sujata Saha

The University of Wisconsin-Milwaukee, 2017
Under the Supervision of Professor Mohsen Bahmani-Oskooee

This study employs the bounds testing approach to cointegration to examine the short run and long
run dynamics between stock prices and exchange rates, accounting for few other macroeconomic
variables such as Consumer Price Index, Industrial Production Index, nominal money supply (M2)
which are known to have effects on stock prices as well. The main contribution of this paper which
is absent in the literature is that the change in nominal effective exchange rate is decomposed into
partial sum of positive changes and negative changes to determine whether the changes in
exchange rates have symmetric or asymmetric effects on stock prices. The analysis is applied to
both developed and developing countries over the period of 1973-2015. The results show that the
effect of exchange rate changes is asymmetric on stock prices. Furthermore, I disaggregate data at
the sectoral level for the U.S. stock market to investigate the performance of different sectors due
to changes in macroeconomic variables and results show that different sectors react differently to
changes in macroeconomic variables and exchange rate changes have asymmetric effects on the
stock price indices of different sectors in the U.S.

ii
To
my parents

iii
TABLE OF CONTENTS
List of Figures ................................................................................................................................ vi
List of Tables ................................................................................................................................ vii
Acknowledgements ........................................................................................................................ ix
Chapter One: Introduction .............................................................................................................. 1
Chapter Two: Literature Review .................................................................................................... 7
Chapter Three: Model and Methodology ...................................................................................... 20
3.1 The Multivariate Model ...................................................................................................... 20
3.1.1 The Linear Model: EX, IPI, CPI and M2 as independent variables ............................. 20
3.1.2 The Non-Linear Model: POS, NEG, IPI, CPI and M2 as independent variables ........ 24
3.2 The Bivariate Model ............................................................................................................ 26
3.2.1 Linear Model: ............................................................................................................... 26
3.2.2 Non Linear Model: ....................................................................................................... 27
Chapter Four: Empirical Results ................................................................................................... 28
4.1 Multivariate Model .............................................................................................................. 28
4.2 The Bivariate Model: .......................................................................................................... 33
Chapter Five: Sectoral Analysis.................................................................................................... 36
4.1 Linear Model: ...................................................................................................................... 36
4.2 Non-Linear Model: .............................................................................................................. 37
4.3 Results ................................................................................................................................. 38
Chapter Six: Conclusion ............................................................................................................... 42
References ..................................................................................................................................... 81
Appendix A: Definition of the Variables ...................................................................................... 86
Appendix B: Data Sources ............................................................................................................ 87
Appendix C.1: Data period for the Multivariate Model ............................................................... 88
Appendix C.2: Data period for the Bivariate Model..................................................................... 89
Appendix C.3: Data period for the Sectoral Analysis for the U.S. ............................................... 90
iv
Appendix D: ARDL Model Equations ......................................................................................... 91
Appendix E: Critical Values ......................................................................................................... 92
Appendix F: Natural Log of LEX, POS, NEG, LIPI, LCPI, LM2 and LSP Graphs .................... 93
Curriculum Vitae ........................................................................................................................ 103

v
LIST OF FIGURES
Figure 1: CUSUSM and CUSUSM Square plots for the multivariate model ……………….. 70-74
Figure 2: CUSUSM and CUSUSM Square plots for the sectoral analysis …………………. 75-80

vi
LIST OF TABLES
Table 1: The ADF Test Results for variables in level …………………………………………. 45
Table 2: The ADF Test Results for first differenced variables ………………………………… 46
Table 3: Estimates of Linear and Non-linear Models for Brazil (multivariate model) …………47
Table 4: Estimates of Linear and Non-linear Models for Canada (multivariate model) ………. 48
Table 5: Estimates of Linear and Non-linear Models for Chile (multivariate model) ………… 49
Table 6: Estimates of Linear and Non-linear Models for Indonesia (multivariate model) ……. 50
Table 7: Estimates of Linear and Non-linear Models for Japan (multivariate model) ………… 51
Table 8: Estimates of Linear and Non-linear Models for Korea (multivariate model) ………… 52
Table 9: Estimates of Linear and Non-linear Models for Malaysia (multivariate model) ……... 53
Table 10: Estimates of Linear and Non-linear Models for Mexico (multivariate model) ……… 54
Table 11: Estimates of Linear and Non-linear Models for U.K. (multivariate model) ………… 55
Table 12: Estimates of Linear and Non-linear Models for U.S. (multivariate model) ………… 56
Table 13.1: Estimates of the Linear Model for the bivariate model …………………………… 57
Table 13.2: Estimates of the Linear Model for the bivariate model …………………………… 58
Table 13.3: Estimates of the Linear Model for the bivariate model ……………………………. 59
Table 13.4: Estimates of the Linear Model for the bivariate model ……………………………. 60
vii
Table 14.1: Estimates of the Non Linear Model for the bivariate model ………………………. 61
Table 14.2: Estimates of the Non Linear Model for the bivariate model ………………………. 62
Table 14.3: Estimates of the Non Linear Model for the bivariate model ………………………. 63
Table 14.4: Estimates of the Non Linear Model for the bivariate model ……………………….. 64
Table 15: The ADF Test Results for the sectoral analysis ……………………………………… 65
Table 16.1: Estimates of Both Linear and Nonlinear ARDL Models (sectoral analysis) ……… 66
Table 16.2: Estimates of Both Linear and Nonlinear ARDL Models (sectoral analysis) ………. 67
Table 16.3: Estimates of Both Linear and Nonlinear ARDL Models (sectoral analysis) ………. 68
Table 16.4: Estimates of Both Linear and Nonlinear ARDL Models (sectoral analysis) ………. 69

viii
ACKNOWLEDGEMENTS
This thesis represents my work at the University of Wisconsin-Milwaukee for the last five years
and is the result of many unique experiences and opportunities – it has indeed been amazing. This
would not have been a success without the support and help of many remarkable individuals whom
I wish to thank and express my sincere appreciation.
First and foremost, I would like to thank God. Throughout this process, I have grown to realize the
impact of his blessings and how they have caused wonders. He has given me the courage, strength
and patience to work through problems faced in order to achieve my dreams.
I express my sincere gratitude and thanks to my advisor, Professor Mohsen Bahmani-Oskooee for
encouraging me during this process. His unwavering support and faith in me and my abilities are
most appreciated. His guidance, patience and immense knowledge have always been a source of
great comfort, has steered me through difficult and uncertain times and have allowed me to grow
as an economist. He has been a great mentor and I owe a lot of my success to him.
I would also like to thank my dissertation committee members, Professor Kundan Kishor,
Professor Rebecca Neumann and Professor Swarnjit Arora. Words truly are not enough to express
my gratitude for all the things they have done for me. Their brilliant comments, suggestions,
direction and co-operation have helped me achieve my goals. I thank all of them for sparing their
valuable time whenever I approached them for guidance.
I thank all the Professors at the Department of Economics whose teaching has helped to develop
the economist in me: Professors Scott Drewianka, Kundan Kishor, Suyong Song, Matthew
McGinty, Filip Vesley, Chuan Goh, Antu Murshid, Avik Chakrabarti and Rebecca Neumann. I
would also like to thank Professors Mohsen Bahmani-Oskooee, Scott Adams, John Heywood,
ix