Essays on stock prices and exchange rates

University dissertation from Uppsala : Acta Universitatis Upsaliensis

Abstract: This thesis consists of five self-contained essays:Essay 1 evaluates several time series models of exchange rate volatility to predict the daily volatility of the U.S. dollar versus the currencies of Germany, Canada and Japan. The models are compared both within-sample and out-of-sample with the main focus on the latter. The results indicate that some of the more general time series models, recently suggested in the literature, do a better job in predicting exchange rate risk.Essay 2 examines the effect of sterilized intervention made by the Riksbank on the level and the volatility of the Swedish krona exchange rate. Some support is found that interventions affect the exchange rate level during certain subperiods but overall the results are weak. Furthermore, in line with the findings for other countries, little empirical support is found for the hypothesis that central bank intervention decreases exchange rate volatility.Essay 3 examines the relationship between the valuation of the stock market and an effective exchange rate. Using monthly data on 10 industrialized countries for the period 1973-1996 it is found that the more open the economy, the stronger is the (positive) relationship between return on the stock market and the exchange rate.Essay 4 investigates the effect of exchange rate fluctuation on a firm's value, the so-called exchange rate exposure, for a sample of Swedish firms. In contrast to previous results, using U.S. data, the values of Swedish firms, as reflected in the stock price, seem quite sensitive to movements in the exchange rate. Studying the cross sectional differences in exposure, the estimated exposure is positively and significantly related to the fraction of total sales made abroad and negatively related to the use of currency derivatives.Essay 5 studies the effects of liberalization on the Swedish stock market. The analysis focuses on whether the Swedish stock market is more connected with foreign stock markets, represented by the U.K. and the U.S., after foreigners were given full access to the Swedish stock market, in January 1993, and if expected returns are determined differently. There appears to be a shift in the variance-covariance dynamics for Sweden and the foreign markets in the U.K. and U.S. Evidence is also found of a shift in the relation between excess returns on the Swedish stock market and both local, as well asinternational measures of risk.

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