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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 21, Issue 4 (Jul 2017)

Issues

Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries

Juan Carlos Cuestas
  • Economics and Research Department, Eesti Pank (Bank of Estonia), Tallinn, Harjumaa, Estonia
  • Department of Economics and Finance, Tallinn University of Technology, Tallinn, Estonia
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Bo Tang
  • Corresponding author
  • Strategic Development Department, Weichai Power Co., Ltd, Weifang, Shandong, China
  • Department of Economics, University of Sheffield, Sheffield, United Kingdom of Great Britain and Northern Ireland
  • Email
  • Other articles by this author:
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Published Online: 2017-07-25 | DOI: https://doi.org/10.1515/snde-2016-0042

Abstract

This study explores the asymmetric exchange rate exposure of stock returns building upon the capital asset pricing model (CAPM) framework, using monthly returns of Chinese industry indices. We are interested in estimating long run and short run relationships as well as asymmetric effects. In order to do so, we estimate nonlinear autoregressive distributed lags models to (1) obtain the long run or cointegrated effects and dynamics, (2) be able to mix I(1) and I(0) variables and (3) to split the effect of positive and negative changes in the variables, i.e. asymmetries. In accordance with the existing literature, industry returns are subject to lagged exposure effects, but the asymmetries vary across industries, which could be due to the discrepancies in, amongst others, trade balance and ownership of certain industries. Furthermore, the dynamic multipliers depict that industry returns quickly respond to changes in the exchange rate and correct the disequilibrium within a short time, making the long run exposure to be symmetric or very small. The remaining shocks are mainly explained by the return of market portfolios. This implies that the ongoing restrictions on the RMB daily trading band do indeed protect the Chinese stock market against the effects of currency movements.

This article offers supplementary material which is provided at the end of the article.

Keywords: asymmetric exchange rate exposure; Chinese industries; NARDL; stock returns

JEL Classification: C58; F3; G15

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Published Online: 2017-07-25


Citation Information: Studies in Nonlinear Dynamics & Econometrics, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2016-0042.

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