Exchange rate risk and the equity performance of financial intermediaries

Dimitrios Gounopoulos, Philip Molyneux, Sotiris K. Staikouras, John O. S. Wilson, Gang Zhao

Research output: Contribution to journalArticlepeer-review

16 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)271-282
Number of pages12
JournalInternational Review of Financial Analysis
Volume29
Early online date19 Apr 2012
DOIs
Publication statusPublished - 1 Sep 2013

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