Trading stocks following sharp movements in the USDX, GBP/USD, and USD/CNY
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RESEARCH
Financial Innovation
Open Access
Trading stocks following sharp movements in the USDX, GBP/USD, and USD/CNY Yensen Ni1, Min-Yuh Day2 and Paoyu Huang3* * Correspondence: [email protected] 3 Department of International Business, Soochow University, No.56, Sec. 1, Kueiyang St., Taipei City 100, Taiwan Full list of author information is available at the end of the article
Abstract We hypothesized that sharp movement in the USDX, GBP/USD, and USD/CNY might result in stock market fluctuations owing to heightened investors’ sentiments. The subsequent performance of trading stocks right after such sharp movements in exchange rates is seldom explored in existing studies. We examined the historical data of the constituent stocks of the DJ 30, FTSE 100, and SSE 50 indexes and found that the share prices were more volatile after sharp movements in the CNY, even though the currency is less volatile because of China’s exchange rate policy. However, for the USD and GBP, share prices of the DJ 30 and FTSE 100, respectively, rose after sharp appreciation and depreciation of the currencies. Keywords: Investing strategies, Exchange rates, Investors’ sentiments
Introduction Share prices are difficult to predict since prices always reflect relevant information according to the efficient market hypothesis (Fama, 1965, 1991, 1998). However, this viewpoint is challenged by the overreaction hypothesis (Debondt & Thaler, 1985, 1987), which supposes that (i) investors may overreact to the available and private information released owing to excessive self-confidence (Chuang & Lee, 2006; Daniel, Hirshleifer, & Subrahmanyam, 1998), (ii) herd behaviors result in chasing rising or falling prices (Chalmers, Kaul, & Phillips, 2013; Mendel & Shleifer, 2012), and (iii) investors’ sentiments and behavioral pscyhology have an impact on price movements (Da, Engelberg, & Gao, 2015; Dergiades, 2012; Huang et al., 2014; Huang & Ni, 2017; Kumar, Page, & Spalt, 2013). In this study, in divergence from the commonly explored causal relationship between share prices and exchange rates (Ajayi & Mougouė, 1996; Basher, Haug, & Sadorsky, 2012; Dornbusch, 1987; Grammig, Melvin, & Schlag, 2005; Pan et al., 2007a, b), we mainly investigated whether market participants are able to beat the market. Instead of employing time-series models, we used the standard event study approach to examine whether investors are able to gain abnormal returns (ARs) and cumulative abnormal returns (CARs). Specifically, we explored whether market participants outperform the
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