Exchange rate risk and its determinants. : Evidence from international stock markets

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This paper evaluates if international stock markets are exposed to fluctuation in theexchange rate and whether this exposure is related to exports, imports and inflation. Eightcountries are studied: Australia, Belgium, Brazil, Hong Kong, Sweden, Switzerland, theUnited Kingdom and the United States. The empirical investigation covers the periodfrom 1995 to 2004 and the estimation is conducted using the framework of Patro, D.K.,Wald, J.K. and Wu, Y. (2002). The empirical findings show that all international stockmarkets are exposed to exchange rate risk, except for Brazil. The amount of exchange rateexposure is found to be sensitive to a country’s export, import and inflation. The resultsimply that there are predictable relationship between changes in the return of the nationalstock index return and fluctuation in the exchange rate. In addi...