Is exchange rate volatility influenced by stock return volatility? Evidence from the US, the UK and Japan

Abstract

This study investigates whether the volatility of exchange rate changes is affected by the volatility of stock returns for three industrialized countries, namely the US, the UK and Japan. These findings suggest that the volatility of home stock returns is a significant determinant of the volatility of exchange rate changes in all three countries, supporting the validity of the asset approach models to exchange rates for the US, the UK and Japan. Moreover, these results can be interpreted as evidence that the financial markets in these countries are integrated, in line with Zapatero (1995).