Are stock returns of German financial and non-financial institutions sensitive to changes in exchange rate, interest rate and market return? Does the exposure to interest rate, exchange rate and market return differ between the different industries in Germany?
Thе рареr expands previous research and sheds new lights on this issues by: firstly, exаminining the impact of exchnage rate exposures on equity valuations in German stock market after the introduction of the euro. The second objective is to investigate the impact of exchange rate and interest rate on German industries stock return. The third objective is to evaluate the exposure to market, exchnage rate, and interest rate risks on companies stock returns. Such a comparative study provides important insights into the industry structure of the German stock market. Here the German case is of interest for different reasons. First, existing studies refer especially on the US, UK evidence. The findings of these studies needs to be examined agianst evidence from other major developed countries such as Germany, whose stock market ranks fourth in terms of market capitalisation after the US, UK and Japan. Second, the growing significance of the German share index over the last decades has posioned Germany among the leading global economic powers. Also, many German industry sectors are heavily export-oriented and are more sensitive to unticipated changes in exchnage rates and interets rates. Third, no study has yet concluded a comprehensive analysis of the effects of the aforementioned variables on German industires.
Table of Contents
1. Introduction
1.1. Objectives of the study
1.2. Structure of the study
2. Literature review
2.1. Empirical evidence of Exchange Rate exposure
2.2. Impact of the Euro on European stock returns
2.3. Empirical evidence of interest rate exposure
2.4. Market, Interest Rate and Exchange Rate risks
3. Methodology
3.1. Research methodology
3.1.1. Data Description
3.1.1.1. Procedure
3.1.1.2. Sample period
3.1.1.3. Data analysis and interpretation
3.2. Research strategies
3.2.1. General methodology
3.2.2. Hypotheses and the Theoretical Methodology
3.2.2.1. Theoretical model
3.2.2.2. Implementing methodology
4. Results
4.1. Correlation among Variables
4.2. Regression Results
4.2.1. Exchange Rate Exposure Analysis
4.2.2. Exchange Rate and Interest Rate Exposure Analysis
4.2.3. Exposure Analysis to Market, Exchange Rate and Interest Rate
5. Conclusion
5.1. Limitations
5.2. Recommendations
Research Objectives and Key Focus Areas
This study aims to examine the sensitivity of German financial and non-financial companies' stock returns to macroeconomic factors, specifically market returns, exchange rate fluctuations, and interest rate changes, following the introduction of the euro. The research evaluates how these exposures differ across various industries and assesses whether this source of risk is priced in the German equity market.
- Empirical analysis of exchange rate exposure for German firms post-euro introduction.
- Investigation of interest rate risk sensitivity across different German industrial sectors.
- Evaluation of the combined impact of market, exchange rate, and interest rate risks on stock returns.
- Comparative analysis of industry-level versus individual firm-level stock return sensitivity.
- Assessment of the validity of regression models in explaining variations in German stock returns.
Excerpt from the Book
Measuring exchange rate exposure
Adler and Dumas (1984) define exchange rate exposure as the effect of exchange rate changes on the value of a firm. The determinants of exchange rate exposure are quite complex. In general, the relationship of industry returns to changes in the value of the domestic currency can be affected by the operational level and market measures of the industry. The sensitivity of the industry value to exchange rate changes depends on the elasticity of the industry’s demand for foreign goods (imports) and in the same time to the elasticity of demand of the foreign markets for the industry’s goods (exports). (Jurion, 1990) suggests that a depreciation of the home currency helps export oriented industries to be competitive in other foreign countries since foreign industries are able to purchase the exported goods. In addition, import oriented industries will benefit from an appreciation of the local currency, as their imports become cheaper in terms of the home currency. Moreover, their products price will be competitive and affordable in the local market.
Consequently, these suggest that German firms and industries will be strongly influenced by exchange rate changes; because German firms are export-oriented we expect appreciations of the euro to hurt their competitive positions, while depreciations will improve them. More importantly, the measured exchange rate exposure of industries can vary according to the event of the European currency, as this sample covers the period after the introduction of the euro. Firms and industries that deal only in the European Union may have little or no exposure during this sample period.
Summary of Chapters
1. Introduction: Outlines the significance of macroeconomic risks like market, exchange rate, and interest rate volatility for German companies and defines the study's research objectives.
2. Literature review: Provides a comprehensive overview of existing empirical studies concerning exchange rate and interest rate sensitivity in international and German stock markets.
3. Methodology: Details the research philosophy, data collection from DataStream (2001-2008), and the specific regression models used to test the hypotheses.
4. Results: Presents and discusses the empirical findings from the regression analyses, highlighting the sensitivity of German industries to the studied financial variables.
5. Conclusion: Summarizes the key findings regarding the impact of macroeconomic variables on German stock returns and offers suggestions for future research.
Keywords
German stock market, Exchange rate risk, Interest rate risk, Market return, Industry-level analysis, Euro introduction, Firm-level sensitivity, Regression analysis, Equity valuations, Multinational companies, Financial performance, Macroeconomic factors, Stock returns, Risk exposure, Empirical study
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines how German financial and non-financial companies' stock returns are affected by fluctuations in exchange rates, interest rates, and overall market returns between 2001 and 2008.
What are the central thematic areas covered in the study?
The core themes include the impact of the euro on stock return sensitivity, the comparative risk exposure of different industries, and the relationship between firm value and macroeconomic volatility.
What is the primary objective of this work?
The study aims to evaluate whether exposure to market, exchange rate, and interest rate risks is priced in German stock returns at both the individual firm and industry level.
Which research methodology is employed?
The study utilizes a deductive research approach, employing Ordinary Least Squares (OLS) regression models to test the hypotheses on a dataset covering 293 companies.
What does the main body of the paper address?
The main body focuses on reviewing the existing literature, describing the secondary data collected, specifying the regression equations, and presenting empirical results for different industries.
Which keywords characterize this work?
Key terms include German stock market, exchange rate risk, interest rate risk, industry-level analysis, and regression models.
How does the introduction of the euro affect the results?
The study finds evidence suggesting that exchange rate sensitivity for many German industries was more evident prior to the introduction of the euro, indicating a potential reduction in currency risk volatility.
Why is the German market considered of particular interest?
Germany is a major global economic power with a highly export-oriented industrial structure, making it uniquely sensitive to international macroeconomic factors compared to other developed economies.
How does interest rate sensitivity compare to exchange rate sensitivity in this study?
The results indicate that interest rate exposures are generally priced more frequently and show a stronger statistical significance than exchange rate exposures within the analyzed period.
What is the significance of the DAFOX index in this research?
The DAFOX index is used as a broad, value-weighted market return benchmark to control for market movements and evaluate how specific financial variables impact German stock returns independently.
- Arbeit zitieren
- Master Amine El Kiassi (Autor:in), 2016, Market, exchange rate and interest rate risks of German financial and non-financial companies. Industry-Level Analysis, München, GRIN Verlag, https://www.grin.com/document/1673304
