Dollar beta and stock returns

Abstract

The financial channel of exchange rates operates through changes in risk-taking by investors and is reflected in the response of financial conditions to exchange rate movements. We show that stock returns also reflect the financial channel of exchange rates, with higher local currency stock returns associated with a weaker dollar. The broad dollar index emerges as a global factor, consistent with the financial channel operating through swings in risk-taking by global investors. We introduce the ‘dollar beta’ as the sensitivity of stock returns to swings in the broad dollar index and show that emerging market stock indices that have a higher dollar beta tend to have higher average returns, implying that the dollar beta is a cross-section risk factor that is priced.

International financial subordination in the age of asset manager capitalism

“…Bond investments are in general safer, offering regular interest payments, which are higher in EM, in contrast to dividends which are performance dependent and up to the discretion of managers. In addition, bonds are less exposed to currency risk than equities, whose returns are related pro-cyclically to local currencies in EM (Bruno et al, 2022. Currency risk can even be entirely removed with foreign currency bonds which predominate in EM, at least in the private sector. Moreover, local bond markets in EM are still dominated by sovereign bonds, which significantly lowers credit risks.…”

The effect of the fear index, dollar index and bitcoin on volatility: An example from Borsa Istanbul

“…Investors make their choices under the presumption that changes in the dollar index have an influence on stock returns (Hughen & Beyer, 2015). Investors commonly use the dollar index as a type of financial indicator (Bruno, Shim, & Shin, 2022). In the literature, the interrelation between stocks, the FI, the dollar index and bitcoin has been examined with various combinations.…”