Currency devaluation and stock market response: An empirical analysis |
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Institution: | 1. Hacettepe University, Faculty of Economics and Administrative Sciences, Department of International Relations, 06800, Beytepe, Ankara, Turkey;2. Hacettepe University, Faculty of Economics and Administrative Sciences, Department of Economics, 06800, Beytepe, Ankara, Turkey;1. Hull University Business School, University of Hull, Hull, UK, HU6 7RX;2. Centre of Computational Finance and Business Analytics, Southampton Business School, University of Southampton Southampton, SO17 1BJ, United Kingdom |
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Abstract: | We study local stock market reaction to currency devaluation by a country's central bank. Devaluations appear to be anticipated by the local stock markets, and there are significant negative abnormal returns even one year prior to the announcement of the devaluation. A negative trend in stock returns persists for up to one quarter following the first announcement, and then becomes positive thereafter, suggesting a reversal. We explore whether changes in macroeconomic variables prior to currency devaluations are related to abnormal stock returns. We find that stock returns are significantly lower if the devaluation is larger and if the country is a developing nation. Furthermore, stock markets decline more around devaluations if reserves are lower, if the real exchange rate has depreciated over the prior years, if the capital account has declined, if the current account deficit has gone up, or if the country credit rating has deteriorated. |
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Keywords: | Currency devaluation Stock market response Macroeconomic factors G14 G15 |
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