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Exchange rate risk and the equity performance of financial intermediaries

journal contribution
posted on 2023-06-08, 15:07 authored by Dimitrios Gounopoulos, Philip Molyneux, Sotiris K Staikouras, John O S Wilson, Gang Zhao
This study uses the VAR-BEKK methodology to examine the relationship between equity returns and currency exposure for a sample of U.S., U.K. and Japanese banks and insurance firms during 2003–2011. The findings indicate that banks' equity returns are negatively related to changes in foreign currency value during the recent financial crisis (2008–2011). That is, the U.S. (Japanese) banking sector returns are negatively correlated to changes in the Japanese Yen (U.S. Dollar). Equity returns of U.S./U.K. insurers are negatively linked to changes in the value of Japanese Yen, and this relationship is accentuated during the crisis. Home currency exposure is not significant for any insurer. When size is taken into account, only small U.S. banks are exposed to home currency changes, while only large Japanese banks are exposed to foreign currency changes. Overall, the negative relationship between the foreign currency value and bank/insurance equity returns supports the “flight to quality” hypothesis from the U.S./U.K. to Japan.

History

Publication status

  • Published

Journal

International Review of Financial Analysis

ISSN

10575219

Publisher

Elsevier

Volume

29

Page range

271-282

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2013-09-09

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