Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Romain Baeriswyl
Author-Name-First: Romain
Author-Name-Last: Baeriswyl
Author-Person: pba446
Author-Name: Alex Oktay
Author-Name-First: Alex
Author-Name-Last: Oktay
Author-Person: pok127
Author-Name: Dr. Marc-Antoine Ramelet
Author-Name-First: Marc-Antoine
Author-Name-Last: Ramelet
Author-Person: pra1117
Title: Exchange rate shocks and equity prices: the role of currency denomination
Abstract: We find that the response of stock prices to the exchange rate reflects a currency denomination effect—that is, a change in the relative international value of firms’ cash flows and equity—rather than a change in domestic economic conditions. To do so, we compute exogenous movements for the Swiss franc on SNB announcement days and trace their effects on Swiss stocks. Exploiting firm heterogeneity reveals that the prices of stocks with foreign-denominated cash flows are considerably more sensitive to the exchange rate. Using the staggered introduction of American Depositary Receipts in Switzerland, we provide causal evidence that cross-listing markedly amplifies the sensitivity of domestic stock prices to exchange rate fluctuations, consistent with the law of one price. Stock market movements that follow central bank announcements should therefore be interpreted with caution because they partially reflect parity movements and not only economic information.

Length: 59 pages
Creation-Date: 2023
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2023/working_paper_2023_05
File-Format: text/html
Number: 2023-05
Classification-JEL: F31, G12, G15
Keywords: International asset pricing, Law of one price, Exchange rate shocks, Cross-listing
Handle: RePEc:snb:snbwpa:2023-05