TY - JOUR
T1 - Impact of exchange rate derivatives on stocks in emerging markets
AU - Bernal-Ponce, L. Arturo
AU - Castillo-Ramírez, Claudia Estrella
AU - Venegas-Martínez, Francisco
N1 - Publisher Copyright:
© 2020 The Author(s). Published by VGTU Press.
PY - 2020/2/24
Y1 - 2020/2/24
N2 - This paper investigates the effect of derivatives on the relationship between the foreign exchange rate and the stock market. A theoretical model is used to extend the understanding of that relationship. Also, the model is tested with an empirical analysis using the GMM strategy for the Mexican and Brazilian stock markets for the period 2007 to 2019. Findings reveal that in addition to the spot exchange rate, exchange rate futures explain the currency exposure, wherein the derivative effect is the most prominent. The result implies that both risk sources should be considered in the implementation of risk management or macroeconomic policy. The theoretical results are extended by applying them to international portfolio management, proposing a strategy to mitigate foreign exchange exposure with derivatives. This study contributes to the literature by explaining why the minimum variance hedge ratio plays an essential role in the foreign exchange rate and stock market nexus.
AB - This paper investigates the effect of derivatives on the relationship between the foreign exchange rate and the stock market. A theoretical model is used to extend the understanding of that relationship. Also, the model is tested with an empirical analysis using the GMM strategy for the Mexican and Brazilian stock markets for the period 2007 to 2019. Findings reveal that in addition to the spot exchange rate, exchange rate futures explain the currency exposure, wherein the derivative effect is the most prominent. The result implies that both risk sources should be considered in the implementation of risk management or macroeconomic policy. The theoretical results are extended by applying them to international portfolio management, proposing a strategy to mitigate foreign exchange exposure with derivatives. This study contributes to the literature by explaining why the minimum variance hedge ratio plays an essential role in the foreign exchange rate and stock market nexus.
KW - Derivatives
KW - Dynamic stochastic programming
KW - Foreign assets
KW - Foreign exchange markets
KW - Futures market
KW - Portfolio
KW - Risk hedging
UR - http://www.scopus.com/inward/record.url?scp=85084127236&partnerID=8YFLogxK
U2 - 10.3846/jbem.2020.12220
DO - 10.3846/jbem.2020.12220
M3 - Artículo
AN - SCOPUS:85084127236
SN - 1611-1699
VL - 21
SP - 610
EP - 626
JO - Journal of Business Economics and Management
JF - Journal of Business Economics and Management
IS - 2
ER -