Exchange rates and firms' liquidity: evidence from ADRs

Article Abstract:

Exchange rate changes can, in principle, affect a firm's value by affecting the firm's earnings or its cost of funds. Existing studies using monthly data over long sample periods find little or no impact of changes in exchange rates on a firm's valuation. We examine a different potential path for exchange rate effects, namely the effect of exchange rate variability on a stock's liquidity. Using transactions data, we examine the microstructure characteristics of United Kingdom and Mexican American Depositary Receipts (ADRs) around two major exchange rate crises -- the pound sterling withdrawal from the European Exchange Rate Mechanism in September 1992 and the Mexican devaluation of December 1994. We conclude that these events of exchange rate turbulence had little or no effect on the trading costs of ADRs in the United States. The results suggest that the impact of exchange rate volatility on market liquidity is not a conduit by which stock values are affected. [C] 2001 Elsevier Science Ltd. All rights reserved. Keywords: ADR; Exchange rate; Market microstructure; Liquidity; Volatility

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Volatility spillovers in East European blackmarket exchange rates

Article Abstract:

This paper tests the efficiency of dollar exchange rate black-markets for the currencies of six formerly socialist countries of Eastern Europe, under conditions of imperfect information, high transaction costs and pronounced turbulence due to political and economic crisis and reform. We find evidence of volatility spillovers in conditional mean affecting only the markets for the Bulgarian lev and Rumanian lei, and limited evidence of volatility spillovers in conditional variance which imply the possibility of some policy coordination emanating from the Soviet Union. Nevertheless, on balance our results lend broad support to the efficiency of exchange rate black-markets, and to previous results concerning floating exchange rate systems in general. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: G12; F31 Keywords: Exchange rates; Black-markets; Market efficiency; Volatility spillovers

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Global property investment and the costs of international diversification

Article Abstract:

The dramatic yen/dollar volatility of 1998 has been popularly ascribed to order flow driven by changing tastes for risk and hedge-fund herding on unwinding yen `carry trade' positions rather than fundamentals. High-frequency evidence of shifting fundamentals is provided by a comprehensive list of macroeconomic announcements. News is found to have significant effects on volatility, but order flow may play a more important role. Since portfolio shifts are revealed to the market through trading, the results are consistent with order flow playing a significant role in the revelation of private information and associated exchange rate shifts. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31; G14; G15; C22 Keywords: Exchange rate volatility; Private information; Order flow; News announcements; Central bank intervention

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