![]() We also consider value-weighted portfolio returns, and the inferences remain unchanged: the hedge portfolio consistently produces a negative monthly return. We use a repertoire of asset pricing models to evaluate the abnormal returns of the hedge portfolio, and the corresponding monthly alphas range from -0.62% to -0.52%. Adjusting for risks only has a trivial influence on the abnormal returns. To be specific, an equal-weighted hedge portfolio taking a long position in the high Δ REER portfolio and a short position in the low Δ REER countries generates a negative average return. Forming quintile country portfolios based on Δ REER, we find a negative relation between Δ REER and subsequent stock return. Therefore, examining the lead-lag relation between Δ REER and subsequent stock returns provides fruitful insights into market efficiency in a global context. In an efficient market, the implications of Δ REER on stock returns should be understood immediately and unbiasedly by investors. This will thus affect the aggregate future profitability of companies listed on the index. Based on this channel, we hypothesize a negative relation between change in REER ( Δ REER) and subsequent stock returns in the global equity markets due to the close link between the strength of a currency and trade competitiveness. Countries with an increase in REER are likely to be less competitive in the global trade market, especially against their major trade partners and vice versa. As such, REER arguably reflects a country's trade competitiveness against its major trade partners well. The weights in computing REER are established based on the relative trade balance of a country's currency against that of each country in the index. REER is defined as the weighted average of a country's currency in relation to an index or basket of other major currencies. In particular, we examine whether the cross-sectional differences in the real effective exchange rate ( REER) are priced as a global equity premium. To achieve this aim, we use 57 country indices spanning from 1969 to 2021. With these backdrops, this study evaluates the implications of a country's currency-implied trade competitiveness on its equity returns. 2 Specifically, does a country's currency-induced trade competitiveness affect the cross-section of international equity returns? ![]() ![]() 1 However, underexplored research is its effect on equity markets, given that public listed companies are now competing globally. Abundant evidence shows that exchange rates play an important role in export and import dynamics. As such, a lower relative national currency is likely to improve future expected cash flows of companies through two channels: higher export values or higher domestic consumption. However, this consequence also boosts economic growth by encouraging consumers to seek domestic alternatives. The downside of this practice is that imports become more expensive. This relation is documented not only aggregately in country-level analysis (Chou, 2000 Marquez & Schindler, 2007 Chit et al., 2010 Nouira et al., 2011 Zhang & Ouyang, 2018) but also at the firm level (Cheung & Sengupta, 2013 Li et al., 2015). The higher export values, henceforth, support economic growth and company profitability. Conventional wisdom suggests that depreciating the value of a currency helps a country to be more trade competitive globally because the prices of goods and services become relatively cheaper. Countries have benefited from faster growth, higher living standards, and new economic opportunities with decades of globalization and increasing trade. Trade is an important aspect driving the economic growth of a country.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |