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Nonlinear Links between Stock Returns and Exchange Rate Movements

By Daniel Hartmann and Christian Pierdzioch

Abstract

Empirical evidence suggests that the link between exchange rate movements and stock returns may be nonlinear. This evidence could reflect fundamental economic effects like, for example, transaction costs in international goods market arbitrage. It could also reflect market inefficiencies if investors could exploit the nonlinearity to systematically improve the performance of simple trading rules. Using monthly data for major North-American and European industrial countries for the period 1973-2006, we found that it would have been difficult for an investor to use information on nonlinearities to improve the performance of a simple trading rule based on out-of-sample forecasts of stock returns.

Topics: F37 - International Finance Forecasting and Simulation: Models and Applications, C53 - Forecasting and Prediction Methods; Simulation Methods, E44 - Financial Markets and the Macroeconomy
Year: 2006
DOI identifier: 10.1080/17446540600972435
OAI identifier: oai:mpra.ub.uni-muenchen.de:2918

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