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Dynamic Relations between Stock Returns and Exchange Rate Changes*


  • *We would like to thank the editor, an anonymous referee, Jungwon Suh, and seminar participants at Florida State University, Bryant University, the 2011 INFINITI conference, and the 2011 Financial Management Association conference for helpful comments. We are also grateful to Steven Englehardt of Boston FactSet for data collection assistance.


We re-examine the relation between stock returns and exchange rate changes in five major European countries (France, Germany, Italy, Switzerland, and the UK), the USA, Canada, and Japan by taking into account dynamic effects, including lagged changes of variables, and employing causal relations. We find that lagged exchange rates have a significant impact on stock returns. We find evidence of Granger causality from exchange rate changes to stock returns, and also for the reverse direction. Furthermore, the dynamic relation has been more significant and stronger in recent years and recession periods than in early periods and expansion periods.