Exchange Rate Risk on Stock Market: Evidence from 2008 Financial Crisis

This paper examines the effect of the exchange rate movement on the stock return as well as the volatility of the stock return. Focusing on seven countries covering both developing and developed ones around the world from January of 2000 to January of 2014, I find the exchange rate has different impacts on the equity return versus on the volatility of the equity return and these impacts change drastically due to 2008 Financial Crisis. For the majority of my sample countries, the exchange rate exposure on the equity return is moderate during normal time periods but increases quite a bit because of the financial crisis, while the exchange rate exposure on the volatility of the equity return is large during normal time periods but decreases because of the crisis. My findings support the theory that the exchange rate contains information about the market expectations on the future cash flows, and thus it can affect the value and the volatility of the stock return