Exchange Rate Volatility and Stock Returns for the U S

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This study attempted to examine the effects of exchange rate volatility, using the squared residuals from the autoregressive moving average (ARMA) models, on stock returns for the U.S. for the period 1980 to 2008. Even though the core variable was exchange rate volatility, this article used several other explanatory variables to explain changes in the stock returns for the U.S. This paper found that exchange rate volatility affects US stock returns. Even though firms engaged in international operations had some methods, such as hedging possibilities, to protect themselves from exchange rate risk, exchange rate volatility might negatively affect firms’ profitability because of increasing cost of covering exchange rate risk under a flexible rate system.   Key words: Exchange rate volatility, international trade, US stock returns.