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
- 3.1. Research 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
Objectives & Thematic Areas
This paper fundamentally aims to investigate the impact of market, exchange rate, and interest rate risks on the stock returns of German financial and non-financial companies at an industry level. The primary research questions explore whether German stock returns are sensitive to these financial variables and if this exposure differs across various industries in Germany, particularly following the introduction of the Euro.
- German stock market analysis
- Exchange rate exposure
- Interest rate risk sensitivity
- Impact of the Euro on stock returns
- Industry-level financial risk assessment
- Application of OLS regression models
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.
Several previous studies have used both nominal and real exchange rate changes and all find that the choice has no significant impact on the results. In this study, the single real exchange rate, namely the Euro/US-dollar will be used. The US-dollar plays a central role for German companies for several reasons. Firstly, the US market is one of the major export (import) markets for German firms. Secondly, different goods such as (oil and other commodities) are internationally priced in US-dollar. Thirdly, various countries have pegged their currencies to the US-dollar, which mean that firms are directly affected by US-dollar exposure. Fourthly, according to (Deutsche Bundesbank, 1997a), the US market is the most important recipient of German foreign direct investment by almost 25%. However, during the sample period, which was the time after the introduction of the euro, the dollar experienced a prolonged depreciation against the euro.
Summary of Chapters
1. Introduction: This chapter sets the stage for the study, highlighting the importance of stock markets and the sensitivity of company stock prices to market, exchange rate, and interest rate risks, especially for German financial and non-financial firms after the euro's introduction. It outlines the research objectives and questions to be addressed.
2. Literature review: This section provides a comprehensive overview of existing empirical literature concerning the relationship between stock returns and market, exchange rate, and interest rate risks, with a specific focus on the impact of the euro on European stock returns and evidence of interest rate exposure.
3. Methodology: This chapter details the research methodology, including the use of secondary data from DataStream International for German financial and non-financial companies from 2001-2008, the deductive research approach, and the specific theoretical models (OLS regression) and hypotheses developed to test the impact of financial variables on stock returns.
4. Results: This section presents the empirical findings from the correlation and regression analyses, discussing the exposure of German individual firms and industry portfolios to exchange rate, interest rate, and market risks, comparing these results with prior studies, and examining the effects after the introduction of the euro.
5. Conclusion: The concluding chapter summarizes the study's main findings, particularly regarding the varying sensitivity of German stock returns to market, interest rate, and exchange rate risks at firm and industry levels, discusses the study's limitations, and offers recommendations for future research.
Keywords
Market risk, Exchange rate risk, Interest rate risk, German companies, Financial institutions, Non-financial institutions, Stock returns, Industry-level analysis, Euro, OLS regression, Macroeconomic factors, Equity valuation, Empirical study, Risk exposure.
Frequently Asked Questions
What is this paper fundamentally about?
This paper fundamentally investigates how market, exchange rate, and interest rate risks affect the stock returns of German financial and non-financial companies, analyzing these relationships at an industry level, particularly in the post-euro introduction period.
What are the central thematic areas?
The central thematic areas include the analysis of stock market sensitivity to various financial risks (market, exchange rate, interest rate), the specific context of the German economy, the impact of the Euro on currency risk, and the comparison of risk exposure across different industries.
What is the primary objective or research question?
The primary objective is to determine if German financial and non-financial institutions' stock returns are sensitive to changes in exchange rates, interest rates, and market returns, and if this sensitivity varies across different German industries.
Which scientific method is used?
The study primarily employs a deductive research approach, relying on secondary data and Ordinary Least Squares (OLS) regression models to test hypotheses regarding the impact of financial variables on stock returns.
What is covered in the main part?
The main part of the paper covers an extensive literature review on financial risks, details the research methodology including data description and theoretical models, presents the empirical results from correlation and regression analyses on exchange rate, interest rate, and market exposure, and concludes with findings, limitations, and recommendations.
Which keywords characterize the work?
Key terms characterizing this work include market risk, exchange rate risk, interest rate risk, German companies, stock returns, industry-level analysis, Euro, OLS regression, and macroeconomic factors.
How does the introduction of the Euro impact exchange rate risk for German companies in this study?
The study suggests that the introduction of the Euro led to a reduction in currency risk in the German stock market, evidenced by a decline in the proportion of industries showing significant exchange rate exposure compared to pre-Euro periods.
Are German financial or non-financial institutions more sensitive to interest rate changes according to the findings?
The study finds that financial institutions are generally more sensitive to changes in the level of interest rates than non-financial corporations, although both industry levels (financial and non-financial) are affected by interest rate changes.
What are the main limitations identified for this study?
The main limitations include the specific time period (2001-2008) which does not allow for a pre-Euro analysis, the focus solely on Germany, and the difficulty in investigating determinants of interest rate exposure due to a lack of publicly available hedging activity data from German firms.
What recommendations does the author provide for future research?
Future research is recommended to expand the sample period to include pre-Euro data, conduct benchmark analyses for other developed European markets, investigate the reasons why certain industries are strongly affected by interest rate risks, and consider additional explanatory variables like unanticipated inflation or consumer price index for greater insight into equity returns.
- Citar trabajo
- Master Amine El Kiassi (Autor), 2016, Market, exchange rate and interest rate risks of German financial and non-financial companies. Industry-Level Analysis, Múnich, GRIN Verlag, https://www.grin.com/document/1673304
