Received: 6 November 2019 Revised: 22 July 2020 Accepted: 28 July 2020

DOI: 10.1002/ijfe.2210

RESEARCH ARTICLE

A firm level analysis of asymmetric response of U.S. stock

returns to exchange rate movements

Afees A. Salisu1 | Kazeem Isah1,2 | Nnenna Ogbonnaya-Orji3

1
Centre for Econometric & Allied
Research, University of Ibadan, Ibadan,
Abstract
Nigeria The extant studies on stock returns–exchange rate nexus have been suspected
2
Department of Economics, Kogi State of aggregation bias, we therefore resolve to revisit the nexus using firm-level
University, Anyigba, Nigeria
data while also accounting for asymmetry. We utilize stock price data covering
3
Research Department, Central Bank of
Nigeria, Abuja, Nigeria
326 firms listed in S&P500 index and organized into 11 sectors. We examine
the probable asymmetric response of these firms to exchange rate movements
Correspondence using the nonlinear panel ARDL method which simultaneously accounts for
Afees A. Salisu, Centre for Econometric &
Allied Research, University of Ibadan, any inherent asymmetry and heterogeneity effects and suitable for large N and
Ibadan, Nigeria. Large T panels. We establish that asymmetry exists in the stock returns–
Email: adebare1@yahoo.com
exchange rate nexus predominantly in the short run. We further show that
exchange rate appreciation (depreciation) produces primarily positive (nega-
tive) effects on stock returns. We also find that the positive impacts overwhelm
the negative impacts in magnitude and statistical significance. Thus, returns
on investment in U.S. stocks differ significantly between currency appreciation
and depreciation and by implication investors seeking to maximize returns
need to exercise some level caution when confronted with sharp swings in
exchange rate particularly during turbulent periods. While the results are
robust to data frequency and to an extent, the choice of foreign currency, they
are sensitive to different market conditions.

KEYWORDS
asymmetry, exchange rate, firm-level analysis, nonlinear panel ARDL, stock returns

1 | MOTIVATION Tunç, 2011; Khan, Teng, Pervaiz, & Chaudhary, 2017;

This study is a firm-level analysis of the asymmetric
effects of exchange rate movements on sectoral stocks
returns. This is based on the theoretical tie for connecting
foreign exchange and stock market fundamentals to the
flow model which specifies positive nexus and the portfo-
lio balance model, which stipulates negative relationship
between the two, especially in the short run (see
Bahmani-Oskooee & Saha, 2015; Chkili, Aloui, &
Nguyen, 2012). The empirical literature informed by
these theoretical constructs are huge (see, e.g., Al-
Shboul & Anwar, 2014; Dellas & Tavlas, 2013; Kasman &
Mahapatra & Bhaduri, 2019; Raza, Shahzad, Tiwari, &
Shahbaz, 2016; Sui & Sun, 2015; Tachibana, 2018; Zivkov,
Njegic, & Mirovic, 2016; Zubair, 2013).1 However, beyond
the predominant evidence of interconnection between
the currency and equity markets, there have been emerg-
ing issues as to whether the nexus between them is linear
or nonlinear. This concern has continued to gain consider-
ation in the literature with quite a reasonable number of
the extant studies affirming the existence of asymmetry in
the nexus between (see, e.g., Ali, Muktar, & Maniam, 2015;
Bahmani-Oskooee & Saha, 2016a, 2016b; Bahmani-
Oskooee & Saha, 2018; Dieci & Westerhoff, 2013;

Int J Fin Econ. 2020;1–20. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons Ltd 1
2 SALISU ET AL.
Koutmos & Martin, 2007; Luqman & Kouser, 2018; Naifar &
Al Dohaiman, 2013; Xu, Chevapatrakul, & Li, 2019).
However, inferences drawn from the bulk of the
aforementioned studies have been suspected of aggrega-
tion bias, hence our resolve to revisit the potential of
exchange rate as a predictor in an asymmetric firm-level
analysis of US S&P 500 returns.2 A notable exception in
this regard is the work of Bahmani-Oskooee and
Saha (2016b), however, we differ from this study in a
number of ways. First, while both studies utilize firm
level data,3 we offer a broader scope using three most
traded reference currencies.4 This consideration is not
trivial as analysts and policy makers often seek possible
generalization of research findings when making policy
decisions. Thus, the consideration of alternative currency
pairs facilitates such generalization. Second, unlike
Bahmani-Oskooee and Saha (2016b) which focus on
stock prices, this present study takes cognizance of the
fact that stock return series would be of concern to equity
and currency markets investors. More so, while our find-
ings of short run asymmetry in the stock returns-
exchange rate nexus align well with the literature, the
appeal to test the robustness of such submission across
different market conditions, choice of data frequency and
macroeconomic environment is another contribution of
the present study.
Essentially, we contribute to the literature in three-
fold. In the first instance, the theoretical justification for
the consideration of asymmetry can be traced to the theo-
retical model of Dieci and Westerhoff (2013) which spec-
ifies the relationship between the stock and currency
markets to be nonlinearly interconnected by design. A
further motivation to consider asymmetry is that we can-
not expect uniform results across all the sectors hence
while exchange rate depreciation may favour export-
inclined firms, the converse may be expected for heavy
import firms in terms of higher production costs, declin-
ing profits, stock prices and stock returns (see Bahmani-
Oskooee & Saha, 2016a; Mitra, 2017). Secondly, we
extend the literature to account for the role of different
market conditions such as pre- and post-global financial
crisis (GFC) periods. Our desire to consider GFC is cor-
roborated by the findings of Hong and Wu (2016) which
show that firm-specific information is germane for
explaining stock price movements particularly during
turbulent times measured with the period of the global
financial crisis. In addition, we are supported by a heap
of empirical evidences which back the role of GFC (see,
e.g., Aquino, 2005; Chkili & Nguyen, 2014; Chun
Mun, 2008; Coudert, Couharde, & Mignon, 2011; Dahir,
Mahat, Razak, & Noordin, 2017; Dua & Tuteja, 2016;
Mahapatra & Bhaduri, 2019; Salisu & Ndako, 2018; Sui &
Sun, 2015).
In addition to accounting for the role of different mar-
ket conditions via pre- and post-GFC, we also test
whether the result is sensitive to successive quantitative
easing measures during the turbulent market conditions.
The U.S. unconventional monetary policy had three
rounds of quantitative easing (QE), namely, QE_1, QE_2
and QE_3, respectively. Each of these programmes gener-
ally amounted to the Federal Reserve buying Treasury
Securities and Mortgage-backed Securities. The act of
purchasing assets by Federal Reserve is likely to lead to
depreciation of domestic currency, USD, and improve-
ment in stock returns. Thus, we find it innovative to fur-
ther enrich the literature with insights into the various
episodes of QE as the underlying source of asymmetries
in exchange rate and its implications on stock returns. In
what can be considered as the third contribution of this
study to the literature, we control for economic activities
(the U.S. industrial production index) and alternative
data frequency (using quarterly data frequency).
In terms of methodology, we apply the Salisu and
Isah (2017) method which formulates a panel data ver-
sion of the nonlinear ARDL model applied by Bahmani-
Oskooee and Saha (2016a). Hence, the nonlinear panel
ARDL proposed by Salisu and Isah (2017) is fitting to
capture the large cross-sectional (N) and large time-series
(T) dimensions of the series (see also Khan, Teng, &
Khan, 2019; Salisu & Ndako, 2018; Swaray &
Salisu, 2018). This method does not only accommodate
asymmetries (one way of resolving nonlinearity issue in
panels), it also simultaneously accounts for any inherent
heterogeneity across units which may bias regression
estimates if ignored when in fact it exists. Our preference
for nonlinear (asymmetric) panel ARDL model as the
most appropriate estimation technique compared to some
notable or conventional alternatives in the literature
hinges on the outcomes of unit root tests. For instance,
the battery of panel unit root tests (Breitung, 2000;
Hadri, 2003; Harris & Tzavalis, 1999; Im, Pesaran, &
Shin, 1997; Levin, Lin, & Chu, 2002; Maddala &
Wu, 1999; Pesaran, 2007) reveal that the series of interest
have mixed order of integration; thus providing strong
motivation for panel ARDL.
With the foregoing, we produce reasonable results on
the effects of exchange rate on stock returns. Like the
previous studies, we establish results predominantly in
the short run that exchange rate movements affect sec-
toral stock returns asymmetrically. Further, we show that
the magnitude and statistical significance of the positive
effect of currency appreciation is comparatively larger
than the negative effect of currency depreciation,
observed prominently in the short run. Our sensitivity
analyses reveal that the extent to which asymmetries
matter in the response of stock returns to exchange rate
SALISU ET AL.
movements is insensitive to the role economic activity,
unaffected by the choice of data frequency, and remain
the same to the choice of Pounds Sterling as the foreign
currency. In the rest of the paper, we discuss literature
issues in Section 2 followed by preliminary analysis, esti-
mation technique, discussion of results and conclusion in
the remaining section culminating in Section 6.
2 | THEORETICAL A ND
EMPIRICAL I S S U E S
As detailed in Salisu and Oloko (2015), there are two the-
oretical foundations on stock returns–exchange rate
nexus namely, the flow model and stock model. The for-
mer is rooted in the goods approach to exchange rate
determinations (see Dornbusch & Fischer, 1980). This
approach predicts a positive relationship between
exchange rate and stock prices/returns on the assump-
tion that the causality runs from exchange rate to stock
returns. What this portends is that currency depreciation
in home country will enhance its trade competitiveness
leading to an increase in its production, profits and con-
sequently stock returns. In the case of the stock model
however, it is often explored from two different perspec-
tives namely, monetary model and the Portfolio Balance
model and both models agree that causality runs from
stock prices to exchange rate. It is however, instructive
that the Portfolio Balance model developed by
Branson (1983) and Frankel (1983) supports a negative
relationship between the two variables of interest on the
ground that investors are risk averse and they are likely
to move their investments to a country or economy with
higher stock returns.
The aforementioned according to Ulku and
Demirci (2012) is expected to cause currency appreciation
in the countries with higher stock returns and deprecia-
tion in countries with lower stock returns. To put differ-
ently, investors with profit as the sole objective are likely
to diversify their investment portfolio from countries
with lower stock returns to countries with higher stock
returns, which as explained in Salisu and Oloko (2015)
will lead to high demand for currency of the countries
with higher stock returns and the reverse is expected to
be the case for the countries with lower stock returns.
From the perspective of Portfolio Balance model, coun-
tries with higher stock returns are most likely to experi-
ence exchange rate appreciation, while currency
depreciation is predicted for countries with lower stock
returns. Taking a rather contrary position, the monetary
model on the other hand predicts a positive relationship
between stock returns and exchange rate while arguing
that the relationship is a monetary phenomenon.
3
The intuition behind the monetary model and its
hypothesis of positive relationship between stock returns
and exchange rate hinge on the fact that a rise in stock
prices cause increasing stock returns and therefore,
makes money less attractive as a store of value. Such a
fall in demand for money as against its increases in terms
of supply has the potential of increasing exchange rate
via PPP (see Groenewold & Paterson, 2011). Like the
monetary model, the Portfolio Rebalancing Approach by
Hau and Rey (2014) also suggests that the stock returns–
exchange rate nexus is positive. The advocates of this lat-
ter approach assume an internationally diversified inves-
tor who, following an upward trend in domestic prices,
perceived the portfolio as over weighted in domestic
stocks and as a result sells the domestic stocks to buy for-
eign equities in return. This is similar to what is earlier
established in the case of monetary model, which put
pressure on the domestic currency to depreciate
(Groenewold & Paterson, 2011).
Deduced from the foregoing is that in addition to
what is studied in this paper, causation also runs from
stock returns to exchange rate. Beyond this however,
there is the models' inconclusiveness on whether the
relationship is positive or negative. We therefore build on
this later concern to hypothesize the potential of
asymmetries in the response of stock returns to exchange
rate movements. As opined by Miller and Reuer (1998),
for example, if a firm explores the real options to hedge
against exchange rate fluctuations, the exposure coeffi-
cients are expected to vary for periods of currency appre-
ciation as compared to periods of currency depreciation.
This is what is known as asymmetric hedging and it trig-
gers our inquisitiveness, that if currency depreciation
induces an increasing stock returns, is it sufficient to
assume that the opposite will hold for currency
appreciation.
In addendum to the theoretical issues, the large vol-
ume of empirical literature concerning the linear (sym-
metric) and the nonlinear asymmetric relationship
between stock prices (returns) and exchange rates have
been extensively highlighted in the motivation section of
this paper. To avoid needless repetition, only the most
relevant are here emphasized. One of the early evidences
on nonlinearity is found in Pan, Fok, and Liu (2007)
which establish that the relation differs among countries
studied based on exchange rate regime in operation and
the size of the stock market considered. Tsai (2012) also
show with Quantile regression that the negative relation-
ship between forex and stock markets fundamentals
become prominent during extremely high/low exchange
rates. Sui and Sun (2015) find that volatility spillover run-
ning from exchange rate to stock returns is pronounced
during the global financial crisis. Sikhosana and
4 SALISU ET AL.
Aye (2018) conclude that information in either forex and
stock markets could be employed to forecast fundamen-
tals in either market due to asymmetric volatility spill-
over between them; however in the short run.
There are also some glimpses of related results based
on firm-level analyses that deserve fair mention. For
example, Bahmani-Oskooee and Saha (2016a) in its sec-
toral study of the asymmetric effects of exchange rate on
U.S. stocks finds that asymmetry truly matters in the
effects of exchange rate on sectoral stock prices especially
in the short run, rather than in the long run. Balaban,
Ozgen, and Girgin (2018) show related results at firm
level that positive and negative effects associated with
days of the week have significant effects on stock returns
and its volatility in an emerging economy. Swaray and
Salisu (2018) did a firm level study of upstream and
downstream oil sector and find that the stock prices of
the sectors react differently to episodic changes in global
oil price as amplified by the global financial crisis. Gupta
and Banerjee (2019) conducted a remotely related study
on the various U.S. energy firms. The study differentiates
between negative and positive news sentiments from
OPEC with the result showing different estimates for the
effects of asymmetric news on the U.S. energy stocks for
the periods of high and low consumer confidence.
3 | D A T A A N D PR E L I M I N A R Y
A N A LY S I S
The variables utilized in this study are monthly observa-
tions of firm level stock returns using S&P500 and
exchange rate returns with the U.S. dollar (USD) as the
home currency and Euro as the reference currency. At
the time of sampling, there are about 505 firms listed on
the S&P500 across different sectors of the U.S. economy,
but quite a reasonable number of the firms are without
information until recently; thus the motivation for our
choice of January, 2000 and December, 2018 as the start
and end dates respectively. To circumvent any potential
outlier effect on the outcome of the regression analyses,
we further omit firms whose price indexes are consis-
tently less than five (5) for straight twelve (12) calendar
months. To this end, the number of firms utilized for the
purpose of this study is 326. The financial, industrial and
health are the sectors with the highest number of firms
with 55, 47 and 44 firms respectively, while information
technology, consumer service, utilities, energy, materials
and communication have 37, 32, 23, 19, 16 and 11 firms,
respectively. Each of consumer staple and real estate sec-
tors has 21 firms.
In addition to USD/Euro exchange rate, we also con-
sider alternative reference currencies namely,
USD/British Pounds (GBP) and USD/Australian dollar
(AUD) for robustness. The essence as earlier established
is to determine whether the asymmetric response of stock
returns varies for alternative exchange rates returns.
However, in addition to partitioning the sample into pre
and post global financial crisis (GFC) period, the QE
measure is captured via dummy variable with the periods
between March and October 2010 denoted as D1, while
D2 covers the periods between November 2010 and
August 2013, and September 2012 for the start of D3.
Each of these dummy variables represents the first, sec-
ond and third rounds of the QE programs, respectively.
More so, we consider an alternative data frequency (using
quarterly data frequency) and as well control for market
conditions in the investigated economy (using industrial
output growth measured as log in differences of indus-
trial production index [IPI]). However, while the stock
price indices are mainly sourced from the Bloomberg ter-
minal, the exchange rate and output variables are
obtained from the Federal Reserve online database. We
present the statistical features of the series in Table 1
where the mean statistics reveal the average stock returns
to be positive for the period under consideration and
across the eleven (11) sectors on the US S&P500. The
mean statistics also reveal the U.S. exchange rate as
appreciating relative to Euro and Australia dollar, but
depreciating against the British Pound Sterling.
Equally, an important statistics in Table 1 relate to
the unconditional risk measure—the standard deviation
values of the return series, which reveal the exchange
rate returns irrespective of the reference currency as rela-
tively more stable or less volatile compared to the stock
returns. However, the highest level of risk potentially
associated with stock returns is observed in Information
Technology followed by Consumer Service and Industrial
sector in that order, while Utilities and Consumer Staple
are the sectors with the least volatile stock returns. The
Financial sector has the highest number of observations
followed by Industrial and Health sectors, while Commu-
nication followed by Materials are the sectors with the
lowest number of observations.
Beyond the descriptive statistics of the series, we fur-
ther subject each of the variables to panel unit root test
which is a precondition for dealing with macro panels
with large T dimension as studied here. Put differently,
the preference for a dynamic heterogeneous panel data
model as appropriate for this study is attributable to the
potential non-stationarity or mixed integration property
of the series. Thus, rather than assuming the presence of
unit root arbitrarily, we favour an evidence-based
approach by employing three different types of panel unit
root tests. As demonstrated in Table 2, the first category
of panel unit root test considered includes Levin, Lin and
SALISU ET AL. 5

T A B L E 1 Summary statistics for

Stock returns Mean Max. Min. SD No. Obs.
stock returns and exchange rate
Communication 0.0036 0.6781 −0.8535 0.0952 2,541
Consumer 1
0.0075 1.2799 −0.8647 0.1078 7,392
Consumer 2
0.0078 0.4871 −0.6835 0.0713 4,851
Energy 0.0174 0.0618 −0.0435 0.0231 950
Financial 0.0056 1.2383 −1.8545 0.0962 12,705
Health 0.0095 1.5235 −1.1478 0.1015 10,164
Industrial 0.0094 0.6255 −1.6421 0.0859 10,857
Information technology (ITC) 0.0065 0.8624 −1.0712 0.1162 8,547
Materials 0.0082 0.9034 −1.0207 0.0838 3,696
Real estate 0.0092 1.0323 −1.0804 0.0935 4,851
Utilities 0.0080 0.5562 −1.9722 0.0676 5,313
Exchange rate and output growth variables
Exchange rates (USD/euro) 0.0004 0.0619 −0.0779 0.0233 2,541
Exchange rate (USD/GBP) −0.0009 0.0598 −0.0954 0.0215 2,541
Exchange rate (USD/AUD) 0.0003 0.0712 −0.1730 0.0287 2,541
Output growth 0.0006 0.0474 −0.0510 0.0179 2,541

Note: In addition to the mean, minimum and maximum values of the series, we also considered
their standard deviation (SD). All the series are expressed in returns/growth rate as the case
may be. For instance, rt = log(zt/zt(−1)) where z represents a particular variable under
consideration.

Chu (Levin et al., 2002), Breitung (2000) and Harris and
Tzavalis (1999) all of which hypothesize the null of com-
mon unit root process. The second category of unit root
tests involving Im, Pesaran and Shin (1997) and Maddala
and Wu (1999) assumes individual unit root process as
the null. The third category of unit root tests
(i.e., Hadri, 2003 Lagrange Multiplier test) involves the
null hypothesis of no unit root with common unit root
process in the panels.
These tests have also been categorized along their indi-
vidual hypotheses and test regressions such that, the first
and second categories are tagged non-stationarity tests while
the third is often referred to as stationarity test in the litera-
ture. While any of the three categories of the panel unit root
tests might be sufficient to ascertain the stationarity status
of the variables, the rationale for the combination of all the
alternative categories is to ensure some level of consistency
and the robustness of results across the three types consid-
ered. We complement these tests with the Pesaran (2007)
test which assumes unit root in the underlying series but in
the presence of cross-section dependence (CD). On the
whole, we find the stationarity status of the variables to be
mixed for the different tests under consideration and across
the different sectors in S&P500. The stationarity however
mainly hovers around I(0) and I(1) orders of integration.
Thus, we can be less bothered about the mixed orders of
integration of the variables, since the underlying framework
for estimation allows for the combination of both I(0) and I
(1) (in so far the level of stationarity does not exceed I(1)).
This in particular, further reiterates the appropriateness of
our choice of panel-ARDL as the preferred estimation
framework in the context of this study.
4 | THE ECONOMETRIC MODEL
AND ESTIMATION TECHNIQUE
Indeed our preference for a non-linear modelling frame-
work to capture the probable asymmetric response of
stock returns to exchange rate movements was mainly
informed by the lack of consensus both among the exis-
ting and emerging theories on whether the direction of
relationship between exchange rate and stock returns is
positive or negative. This is further corroborated by the
theoretical model indicating that the nexus between
stock and exchange rate market fundamentals is inher-
ently nonlinear (see Dieci & Westerhoff, 2013). More so,
the fact that our unit root testing results suggests the vari-
ables of interest exhibit mixed order of integration further
motivate our bias for the non-stationary heterogeneous
panel data model to capture not only the inherent hetero-
geneity in large cross-sections (N) and large time periods
(T) but to also accommodate the mixed integration prop-
erty of the variables in question.
6 SALISU ET AL.

TABLE 2 Panel unit root test result

The null hypothesis for different test methods

No unit root with

common unit Unit root in the
Unit root with common process Unit root with individual unit root process root process presence of CD

Stock returns LLC Breitung HT IPS ADF Fisher Hadri Pesaran CD

Communication −33.880*** −16.771*** −0.026*** −37.341***
a a a a
397.602*** a
−3.606 b
−6.016***a
Consumer1 −60.812***a −34.633***a −0.447***b −62.191***a 1,209.50***a −0.679a −5.893***a
Consumer 2
−47.835*** −19.713*** −0.480*** −51.841***
a a b a
804.633*** a
−4.973 b
−6.070***a
Energy −24.173***a −16.228***b −0.040***a N/A 202.848***a −4.604b −3.325***a
Financial −75.166***a −33.102***a −0.436***b −81.511***a 2,161.36***a −8.031b −5.990***a
Health −62.281***a −23.455***a −0.486***b −75.607***a 1,639.55***a −6.914b −6.054***a
Industrial −70.627*** −37.308*** −0.012*** −77.190***
a a a a
1,828.77*** a
−3.435 a
−6.022***a
ITC −57.583***a −23.994***a −0.021***a −69.091***a 1,354.11***a −6.470b −5.987***a
Materials −40.242***a −18.697***a −0.013***a −44.941***a 671.295***a −2.289a −6.102***a
Real estate −49.713***a −37.932***a −0.023***a −51.106***a 758.290***a −5.024b −5.530***a
Utilities −50.115*** −17.983*** −0.461*** −54.048***
a a b a
779.380*** a
−5.138 b
−5.749***a
Exchange rate and output growth variables
USD/Euro −30.554***a −18.045***a −0.284***b −29.792***a 295.572***a −3.587b –
USD/GBP −25.561***a −20.390***a −0.388***b −30.809***a 354.134***a −3.599b –
USD/AUD −30.506*** −15.130*** −0.218*** −27.986***
a a b a
278.789*** a
−3.569 b
–
Output growth −41.494*** −44.010*** −0.444*** −45.327***
a a b a
303.688*** a
−3.673 b
–

Note: a and b denote stationarity at level and at first difference respectively, while ***, **, * indicate statistical significance at 1%, 5% and 10%
respectively. The numeric superscripts 1 and 2 differentiate consumer discretionary sector from consumer staple sector. All the series are
expressed in returns.

Δ rit = β0i + β1i ri, t − 1 + β2i+ et+− 1 + β2i− et − 1

Essentially, we adopt the Salisu and Isah (2017)
X
N1 N2 
X 
method, a Panel data version of the nonlinear ARDL
−+ λij Δri, t − j + γ ij+ Δet+− j + γ ij− Δet−− j + μi + εit
developed by Shin, Yu, and Greenwood-Nimmo (2014) j=1 j=0
and a nonlinear version of the Panel ARDL by Pesaran,
ð1Þ
Shin, and Smith (2001). Unlike the linear (symmetric)
version, the Salisu and Isah (2017) approach often
referred to as nonlinear panel ARDL has the desired attri- where rt is the log return of stock prices; et+ and et− are
butes that enable us capture the asymmetric response of respectively computed as positive and negative changes
stock returns to exchange rate movements. In other in exchange rate and they equally depict currency depre-
words, the conventional panel ARDL framework by ciation and appreciation, respectively. Further, we use
Pesaran et al. (2001) would have limited us to assume the Shin et al. (2014) approach to decompose the
that currency appreciation and currency depreciation exchange rate series into et+ and et− as described below:
have identical impact on stock returns, which is
unsuitable for our hypothesis of asymmetry in the nexus X
t X
t

and the Shin et al. (2014), which accounts for et+ = Δeik+ = maxðΔeik ,0Þ ð2Þ
k=1 k=1
asymmetries, would have pushed us to carry out distinct
time series analyses for each of the firms/sectors which
X
t X
t
can be very demanding for large cross-sections. Hence, et− = Δeik− = minðΔeik , 0Þ ð3Þ
the nonlinear version of the panel ARDL proposed by k=1 k=1
Salisu and Isah (2017) is fitting. Thus, we formulate the
nonlinear Panel ARDL predictive model for the stock The long run coefficients for et+ and et− are respectively
β2i+ β−
returns – exchange rate nexus as follows5: obtained as − β and − β2i after re-parameterizing
1i 1i
SALISU ET AL.
Equation (1). A reduced form of Equation (1) expressed
in error correction form yields the following:
Δ rit = τi ξi, t − 1 + βi+ et+− i + βi− et−− i
X
N1 N2 
X 
+ λij Δri, t − j + γ ij+ Δet+− j + γ ij− Δet−− j + μi + εit ð4Þ
j=1 j=0
The term (ξi,t − 1) in Equation (4) is the error correc-
tion term which is reflecting the potential of long run
equilibrium in the relationship. The parameter τi on the
hand is the speed of adjustment term which captures
how long it takes the system to revert to the long run
equilibrium state in the presence of a shock.
The nonlinear Panel ARDL described in Equation (4)
is appropriate for this study where T is large enough for
nonstationarity to be a suspect and N is sufficiently large
to anticipate heterogeneity. The two notable estimation
techniques often explored to estimate the above specified
heterogeneous panel data model are the Mean Group
(MG) estimator and Pooled Mean Group (PMG) estima-
tor. Some of the computational advantages of using these
estimators and other relevant details are documented in
Salisu and Isah (2017) and Salisu and Ndako (2018). The
difference between the MG and PMG estimators lies in
the estimation procedure. For the MG estimator, it relies
on estimating N time-series regressions and averaging
the coefficients, while PMG estimator on the other hand
involves both pooling and averaging of coefficients. In
other words, the MG estimator allows the slope coeffi-
cients to vary across units both in the long run and short
run while for the PMG estimator, the slope coefficients
are identical in the long run for all units while they are
allowed to vary in the short run. Choosing between the
two estimators requires the familiar Hausman test where
the non-rejection of the null hypothesis implies the adop-
tion of the PMG estimator while the rejection favours the
MG estimator. Thereafter, we test for the presence or oth-
erwise of long run asymmetry as follows: the null hypoth-
esis of H 0 : βi+ = βi− is tested against the alternative
hypothesis of H 1 : βi+ ≠βi− . For the short run asymmetric
cointegration, we test the null hypothesis of H 0 : γ ij+ = γ ij−
against the alternative hypothesis of H 1 : γ ij+ ≠γ ij− .
5 | E M P I R I C A L RE S U L T AN D
DISC USS I ON OF FINDINGS
As noted earlier, to empirically answer the question as to
whether the U.S. equity market responds differently to
exchange rate appreciation and depreciation, we consider
over 300 firms across the 11 sectors captured in S&P500.
7
For the purpose of robustness, we partition our results into
five. First, we evaluate the dynamics of asymmetric
response of stock returns to USD/Euro exchange rate
movements both in the long and short run situations. Sec-
ond, we consider alternative reference currencies, namely
USD/GBP and USD/AUD to test whether the outcomes
will vary with alternative exchange rates. Third, we test
whether our finding is episodic by partitioning the sample
into pre- and post-GFC sub-samples. Fourth, we control
for economic activities via the industrial production index
of the U.S. economy. However, while the theoretical rela-
tionship between stock returns and real economic activity
has long been established through demand-side shock
channel (see Tsagkanos & Siriopoulos, 2015), the concern
here is whether such relationship matters for the asym-
metric response of stock returns to exchange rate move-
ments. Finally, we test whether the choice of data
frequency matters in the nexus, in other words, are the
results sensitive to the choice of data frequency? This ques-
tion is also answered in the empirical analyses.
5.1 | The USD/Euro exchange rate
perspective
Recall that our choice of preferred estimator between the
two alternatives under consideration (i.e., MG and PMG)
is informed by the outcome of our Hausman test results. A
look at Table 3 shows that the Hausman test statistic
favours the PMG estimator most of the sectors except
Health, ITC, Materials and Utilities sectors where the MG
estimator is favoured. Consequently, we then proceed to
first examine the role of asymmetries in the nexus using
the Wald restriction test in line with the standard practice
in the literature (see, e.g., Salisu & Ndako, 2018). Quite an
interesting finding in this regard is the fact that the Wald
tests is mixed not only across sectors but over the short
and long run situations. That is, while the null of no asym-
metry appears to be consistently rejected for quite a rea-
sonable number of the sectors, it is largely a short run
phenomenon. Thus, the first conclusion from Table 3 is
that stock returns respond differently to positive and nega-
tive changes in U.S. exchange rate. Note that positive
changes in exchange rate (er+) imply currency deprecia-
tion while it is appreciation for negative changes (er−).
The interpretation of the regression results for the
individual coefficients proceeds as follows. Starting with
the short run dynamics, we find that the coefficient on
currency depreciation (er+) has a depressing effect on
stock returns, while the reverse is the case for currency
appreciation (er−) which on the hand exhibits the poten-
tial of improving stock returns. This outcome appears to
mirror the study of Swaray and Salisu (2018) which finds
 8

TABLE 3 Stock returns—USD/euro exchange rate nexus

Variable 1 2 3 4 5 6 7 8 9 10 11
er −0.682*** −0.234 0.399*** −0.0822
(0.168) (0.285) (0.133) (0.191)
+
er 0.0031 0.0375 −3.1540*** −1.333*** −0.361 −0.511*** −1.309***
(0.376) (0.192) (0.498) (0.107) (0.520) (0.119) (0.363)
er− −1.530*** −1.228*** 4.518*** 0.273* −0.855** 0.0604 0.100
(0.461) (0.265) (0.910) (0.145) (0.425) (0.158) (0.807)
Δer 0.347***
(0.0393)
+
Δer −0.160 −0.386*** 0.0985 0.495*** −0.0866 −0.321*** −0.0972 −0.318*** −0.0999 −0.316***
(0.101) (0.0922) (0.105) (0.170) (0.0580) (0.0564) (0.0820) (0.0905) (0.115) (0.0637)
−
Δer 1.054*** 1.157*** 0.445*** −1.376*** 1.057*** 1.114*** 0.792*** 1.272*** 1.217*** 0.530***
(0.148) (0.130) (0.120) (0.165) (0.120) (0.0872) (0.111) (0.176) (0.148) (0.0556)
^ξt − 1 −0.049*** −0.062*** −0.070*** −0.133*** −0.067*** −0.083*** −0.065*** −0.095*** −0.0858*** −0.0574*** −0.0694***
(0.0067) (0.0040) (0.0059) (0.0213) (0.0046) (0.0069) (0.0041) (0.0070) (0.00787) (0.00413) (0.00579)
Constant – – – – – – – – – –
 2
Hausman test χ k 2.51(0.2850) 1.06(0.5891) 2.74(0.2547) N/A 2.22(0.3296) 9.25(0.0098) 0.26(0.8793) 6.71(0.0350) 8.06(0.0178) 2.02 (0.3637) 8.93(0.0115)
WSR F − stat 30.41(0.0000) 84.42(0.0000) 3.33(0.0679) 37.67(0.0000) 59.04(0.0000) 1.13(0.2876) 168.10(0.0000) 32.15(0.0000) 56.86(0.0000) 33.11 (0.0000) 82.67(0.0000)
WLR F − stat 4.57(0.0325) 10.67(0.0011) 1.52(0.2173) 45.40(0.0000) 59.46(0.0000) 37.25(0.0000) 6.15(0.0131) 62.52(0.0000) 1.42(0.2337) 2.08 (0.1489) 1.96(0.1611)
Log likelihood 2,622.21 6,808.359 6,679.637 No convergence 13,277.72 10,602.6 12,299.88 7,314.052 4,254.061 5,379.777 7,522.192

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
SALISU ET AL.
SALISU ET AL.
contrasting evidence between upstream and downstream
sectors as regards oil-stock nexus. The difference between
Swaray and Salisu (2018) and our study lies essentially in
the choice of predictor series where the former considers
oil price while we focus on exchange rate. It is also inter-
esting to point out the fact that the statistical significance
and magnitude of the positive effect of currency apprecia-
tion is comparatively higher than that of the negative
effect of currency depreciation, albeit with a higher inci-
dence in the short run. Notable exception in this regard
is the energy sector, where the stock returns appear to
respond positively to currency depreciation and nega-
tively to currency appreciation. More so, when compared
to other individual sectors, the magnitude of the elasticity
coefficients both positive and negative changes in
exchange rate are comparatively higher for the energy
sector followed by communication, financial, ITC and
consumer services, while firms in consumer staple then
utility sector have the least elasticity coefficients.
In the long run however, not only does the hypothesis
of asymmetry fail to hold in four (4) of the eleven (11) sec-
tors under consideration, even where it holds, the
response appears to be predominantly negative for both
positive exchange rate (currency depreciation) and nega-
tive exchange rate (currency appreciation) coefficients.
To put differently, irrespective of the direction of
exchange rate movements in the long run, both currency
appreciation and depreciation are likely to have depress-
ing effects on stock returns, but energy sector is a notable
exception. On the one hand for instance, we find cur-
rency depreciation as capable of reducing holdings of
U.S. stocks in the energy, financial, industrial and ITC
sectors with the potential of investors switching to securi-
ties dominated in foreign currency (i.e., the Euro). Stud-
ies such as Cuestas and Tang (2015) and Bahmani-
Oskooee and Saha (2016a), among others, have also dis-
tinguished between short-run and long-run asymmetric
effects of exchange rate on stock returns while the greater
impacts noticed in the short run align with the evidence
from Sikhosana and Aye (2018) and Bahmani-Oskooee
and Saha (2016a). Similar evidence is observed in other
related studies using predictors of stock returns other
than exchange rate (see, e.g., Badeeb & Lean, 2018; Sal-
isu & Isah, 2017; Salisu, Raheem, & Ndako, 2019; Salisu,
Swaray, & Oloko, 2019; Swaray & Salisu, 2018;
Trabelsi, 2017). Our finding of notable adverse effects of
currency depreciation on stock returns equally finds sup-
port in portfolio balance hypothesis as well as the works
of Fang (2002) and Patro, Wald, and Wu (2002). Remark-
ably, our study is more encompassing than all the afore-
mentioned given its consideration of firm level data
which in a way helps to draw meaningful generalizations
from the findings.
9
5.2 | The alternative exchange rate
perspective
We further subject our findings to robustness check using
alternative reference currencies, namely, the pound ster-
ling (GBP) and the Australian dollar (AUD). This
approach of validating or establishing the limit of empiri-
cal estimates is becoming a standard practice in the liter-
ature. For example, Swaray and Salisu (2018) while
examining oil-stock nexus use three oil proxies namely
West Texas Intermediate, Brent and Dubai-Fatteh (see
also Salisu & Isah, 2017; Salisu, Raheem, & Ndako, 2019,
among others, which also utilize alternative proxies for
oil price). In a similar fashion, Salisu, Adekunle, Alimi,
and Emmanuel (2019) in their study of the relationship
between commodity price returns and exchange rate
make use of five most traded currency pairs in the world.
We follow suit in testing the robustness of our findings to
alternative reference currencies for U.S. exchange rate.
Starting with the pound sterling (GBP), the empirical
results in Table 4 seem to suggest that the extent to which
asymmetries matter in the response of stock returns to
exchange rate movements is insensitive to the choice of
reference currency. To put it differently, even when the
exchange rate is measured as USD/GBP, our findings on
the short run and long run asymmetric effects of cur-
rency appreciation and depreciation on stock returns
appear to be relatively similar to those earlier established
both in terms of sign and magnitude. However, unlike
when the reference currency is Euro or GBP, the result of
the Wald restriction test in Table 5 seems to suggest that
when the currency reference is AUD, the null hypothesis
of no asymmetry is overwhelmingly rejected not only in
the short run but also in the long run. We also find that
when the reference currency is AUD, both the currency
appreciation and depreciation exhibit same potential of
causing depressing effects on stock returns except in the
long run, where the results appear to be consistent with
the portfolio balance assertion of adverse effect of cur-
rency depreciation on stock returns while the reverse
seems to be the case for currency appreciation. The main
conclusion here is that the nexus may be less sensitive to
the choice of reference currency for U.S. exchange rate.
5.3 | Is the nexus sensitive to different
market conditions?
5.3.1 | The global financial crisis
perspective
We further partition the sample into pre- and post-global
financial crisis (GFC) periods, and the essence is to test
 10

TABLE 4 Stock prices—USD/GBP exchange rate nexus

Variable 1 2 3 4 5 6 7 8 9 10 11
er −0.415*** (0.158) 0.195** (0.0973) −0.0229 (0.286) 1.459*** (0.306)
+
er −0.628 0.244** 4.686*** −1.856*** 0.234 −1.457*** 0.114
(1.096) (0.0965) (0.694) (0.368) (0.639) (0.281) (0.294)
−
er −0.879 0.235** −2.413*** 0.0253 −0.999** −0.132 0.560*
(1.145) (0.108) (0.752) (0.505) (0.462) (0.256) (0.302)
Δer −0.628***
(0.0771)
+
Δer −0.00944 −0.325*** −0.896*** 0.112 0.0763 −0.237*** −0.403*** −0.165 −0.184** −0.141*
(0.119) (0.110) (0.343) (0.0733) (0.0724) (0.0790) (0.0982) (0.112) (0.0784) (0.0771)
−
Δer 0.983*** 0.839*** 0.274 0.884*** 0.584*** 0.871*** 0.845*** 0.953*** 1.030*** 0.144**
(0.191) (0.113) (0.311) (0.0895) (0.0682) (0.0820) (0.0826) (0.165) (0.143) (0.0632)
^ξt − 1 −0.060*** −0.059*** −0.088*** −0.150*** −0.081*** −0.069*** −0.062*** −0.058*** −0.064*** −0.078*** −0.0813***
(0.0097) (0.0044) (0.012) (0.0266) (0.0065) (0.0060) (0.0043) (0.0047) (0.0062) (0.0056) (0.00690)
Constant – – – – – – – – – – –
 2
Hausman test χ k 18.05(0.0001) 0.43(0.8079) 11.67(0.0029) N/A 7.00(0.0303) 6.66(0.0357) 1.21(0.5449) 2.65(0.2658) 0.86(0.6512) −54.23 1.38(0.5014)
WSR F − stat 15.79(0.0001) 50.28(0.0000) 0.01(0.9145) 1.28(0.2583) 40.62(0.0000) 15.16(0.0001) 78.47(0.0000) 58.99(0.0000) 31.50(0.0000) 51.87(0.0000) 6.09(0.0136)
WLR F − stat 6.38(0.0116) 1.87(0.1718) 14.51(0.0001) 82.35(0.0000) 65.70(0.0000) 3.44(0.0637) 0.06(0.8141) 9.23(0.0024) 0.96(0.3259) 1.14(0.2865) 7.74(0.0054)
Log likelihood 2,624.219 6,772.916 6,663.997 No convergence 13,229.36 10,556.51 12,242.62 7,272.083 4,226.307 5,381.238 7,489.078

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
SALISU ET AL.
 SALISU ET AL.

TABLE 5 Stock prices—USD/AUD exchange rate nexus

Variable 1 2 3 4 5 6 7 8 9 10 11
+
er 0.926*** −0.132 −0.182* 0.507 −1.060*** −0.588*** −0.113 −0.682*** −0.0714 0.180 −0.345***
(0.311) (0.155) (0.103) (0.737) (0.181) (0.0940) (0.0893) (0.170) (0.317) (0.137) (0.0953)
−
er −0.0904 −0.166 0.286* 5.656*** 0.745** 0.677*** 0.994*** 0.685*** 0.428 1.332*** 0.453***
(0.412) (0.220) (0.148) (1.337) (0.338) (0.133) (0.125) (0.237) (0.334) (0.190) (0.136)
Δer 0.321*** 0.185***
(0.0623) (0.0542)
+
Δer 0.281*** 0.138 0.455*** 0.308*** 0.196*** 0.342*** 0.335*** 0.462*** 0.0881
(0.102) (0.0892) (0.0593) (0.0811) (0.0531) (0.0781) (0.104) (0.0854) (0.0733)
Δer− 0.965*** 1.112*** 0.788*** 0.683*** 0.912*** 0.936*** 0.945*** 0.983*** 0.506***
(0.156) (0.113) (0.111) (0.0778) (0.0746) (0.0887) (0.0792) (0.104) (0.0736)
^ξt − 1 −0.037*** −0.057*** −0.063*** −0.114*** −0.076*** −0.056*** −0.063*** −0.052*** −0.077*** −0.0645*** −0.060***
(0.0098) (0.0047) (0.0075) (0.0255) (0.0061) (0.0064) (0.0054) (0.0050) (0.010) (0.00471) (0.0064)
Constant – – – – – – – – – – –
Hausman test 1.66(0.4350) 3.99(0.1362) 0.35(0.8375) N/A 6.22(0.0454) 3.60(0.1652) 1.75(0.4179) 0.56(0.7561) 13.04(0.0015) 4.42(0.1094) 2.21(0.3304)
 2
χk
WSR F − stat 19.64(0.0000) 55.82(0.0000) 0.44(0.5054) 0.99(0.3189) 6.58(0.0103) 7.47(0.0063) 81.91(0.0000) 25.30(0.0000) 28.33(0.0000) 16.95(0.0000) 54.48(0.0000)
WLR F − stat 2.95(0.0861) 0.01(0.9124) 5.24(0.0220) 32.52(0.0000) 130.09(0.0000) 46.02(0.0000) 40.56(0.0000) 17.27(0.0000) 5.96(0.0147) 18.23(0.0000) 17.57(0.0000)
Log likelihood 2,662.386 6,907.22 6,698.332 No convergence 13,458.45 10,696.46 12,459.26 7,412.157 4,300.762 5,496.421 7,559.055

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
11
12
whether our findings of the significance of asymmetry in
the stock returns–exchange rate relationship is episodic.
Studies such as Mahapatra and Bhaduri (2019), Dahir
et al. (2017), Dua and Tuteja (2016), Sui and Sun (2015),
Chkili and Nguyen (2014), Chun Mun (2008),
Aquino (2005), among others, have also considered the
nexus from the perspective of pre and post financial/eco-
nomic crisis periods. What however constitutes an inno-
vation in this study is whether such period of tranquility
relative to turbulence is valid for our hypothesized asym-
metric response of sectoral stock returns to exchange rate
movements.
The regression results as presented in Tables 6 and 7
show the short and long run estimates of the periods
before and after the GFC, respectively. The results com-
ing from the Wald restriction test show that stock returns
in six (6) of the 11 sectors have the potential of
responding asymmetrically to changes in exchange rate
in the short run for both the pre- and post-GFC periods.
However, while the null hypothesis of no asymmetry
appears to be rejected for all the sectors in the long run
situation of post GFC, the occurrence of long run asym-
metric response of stock returns to changes in exchange
rate is equally evident in the pre GFC period but only for
seven (7) sectors.
In what appears to validate our hypothesis of episodic
asymmetric response of stock returns to changes in
exchange rate, we find that both currency appreciation
and depreciation tend to induce positive stock returns in
the post-GFC period compared to the period before
it. Notable exceptions in this regard include the case of
communication sector as well as consumer services sec-
tor, where in the long run a strong dollar relative to euro
(currency appreciation) tends to have a negative effect on
stock returns in the post-GFC period. Similarly, in the
short run, the regression results reveal weak dollar rela-
tive to euro (i.e., currency depreciation) to be inducing
negative stock returns in the post-GFC period for com-
munication and utilities sectors.
Quite in line with the theoretical a priori, our findings
for the pre-GFC period show evidence of potential
adverse effects of currency depreciation on stock returns.
This is also the case in the long run analysis for the pre-
GFC case and quite evident in a number of sectors
namely, communication, health, industrial, ITC and
materials. In the short run, the results of the pre-GFC
sample show that stock returns in these sectors respond
positively to currency depreciation and negatively to cur-
rency appreciation and same hold for the financial sector.
The overall conclusion here is that the asymmetric
response of stock returns to exchange rate movements is
episodic. This episodic response of stock returns to eco-
nomic fundamentals is consistent with the studies of
SALISU ET AL.
Salisu, Onipede, and Adekunle (2019), Salisu and
Ndako (2018), and Swaray and Salisu (2018) but with dif-
ferent predictors for stock returns. In fact, recent studies
investing the impact of COVID-19 pandemic such as
Okorie and Lin (2020) and Salisu, Ebuh, and
Usman (2020), among others have also validated the epi-
sodic response of stock returns to economic fundamen-
tals during tranquil and turbulent (pandemic) periods.
5.3.2 | The QE perspective
We also offer insights into the underlying factors that
have constituted the source of asymmetries in the stock
return-exchange rate nexus (see also, Salisu &
Ndako, 2018). Thus, we go a step further to test whether
our finding of asymmetric response of stock returns to
exchange rate is influenced by exogenous conditions such
as the three rounds of QE programmes implemented by
the Federal Reserve during the turbulent market condi-
tion. A cursory look at Table 8 reveals the coefficient on
each round of the QE programmes to be statistically sig-
nificant and across all the individual sectors under con-
sideration. However, compared to our earlier finding
where the evidence of asymmetry in the considered
nexus appears to be mainly a short run phenomenon, the
Wald test results in Table 8 consistently reject the null
hypothesis of no long run asymmetry in all the 11 sectors
under consideration.
Quite robust to our earlier finding (see Table 3) is the
regression results with notable evidence of stock returns
responding differently to currency appreciation and
depreciation. But this time around, the evidence is con-
sistent not only in the short run but also in the long run
thus confirming our hypothesis of QE as an exogenous
factor that has sustained asymmetries in the stock
returns-exchange rate nexus for USA.
5.4 | The role of macroeconomic
environment in stock returns–exchange
rate nexus
We further extend the nexus to include the role of eco-
nomic activities in the investigated economy. This is par-
ticularly motivated by the theoretical relationship
between stock market and the real economic activity in a
country. This is often explored via the demand-side
shocks on the assumption that a positive productivity
shock (precipitated by positive demand shock) will lead
to higher revenue or profits and consequently result in
increase in dividends and stock returns (see Tsagkanos &
Siriopoulos, 2015). On whether the inclusion of economic
 SALISU ET AL.

TABLE 6 Pre-GFC perspective

Variable 1 2 3 4 5 6 7 8 9 10 11
er −0.199** 1.828
(0.0918) (1.187)
+
er −2.322*** 1.916 0.156 −3.154*** −0.548*** −1.390*** −1.383* −0.628*** 0.354
(0.344) (1.610) (0.182) (0.498) (0.210) (0.176) (0.746) (0.189) (0.263)
−
er 1.771*** −0.191 −0.367* 4.518*** 1.006*** 0.0293 4.889*** 0.442** −0.497*
(0.368) (0.961) (0.195) (0.910) (0.240) (0.187) (1.065) (0.198) (0.276)
Δer −0.458*** 0.0871* −0.0326 0.0079
(0.0745) (0.0496) (0.114) (0.053)
Δer+ 0.522** 0.495*** 0.212*** 0.587*** −0.0126 0.284* 0.002
(0.203) (0.170) (0.0767) (0.203) (0.0897) (0.154) (0.099)
−
Δer −0.983*** −1.376*** −0.964*** −1.321*** −0.485*** −1.535*** −0.708***
(0.316) (0.165) (0.125) (0.328) (0.155) (0.284) (0.163)
^ξt − 1 −0.184*** −0.189*** −0.176*** −0.135*** −0.135*** −0.176*** −0.207*** −0.213*** −0.125*** −0.154***
(0.0350) (0.0154) (0.0235) (0.0117) (0.0141) (0.0117) (0.0171) (0.0317) (0.0167) (0.0228)
Constant – – – – – – – – – – –
 
Hausman test χ 2k 2.27(0.3215) 5.29(0.0709) 2.21(0.3317) N/A 4.41(0.1103) 2.58(0.2752) 4.52(0.1046) 5.84(0.0539) 2.11(0.3418) 2.19(0.3352) 17.39(0.0002)
WSR F − stat 9.81(0.0017) 1.94(0.1641) 1.06(0.3032) 37.67(0.0000) 42.39(0.0000) 13.68(0.0002) 4.54(0.0332) 23.74(0.0000) 0.37(0.5435) 2.26(0.1330) 8.12(0.0044)
WLR F − stat 46.45(0.0000) 21.45(0.0000) 2.74(0.0979) 45.40(0.0000) 0.43(0.5109) 16.59(0.0000) 21.48(0.0000) 92.56(0.0000) 10.82(0.0010) 3.51(0.0610) 2.16(0.1415)
Log likelihood 1,037.372 2,800.043 2,676.671 No convergence 6,154.113 3,988.968 5,095.914 2,431.098 1,830.573 2,634.97 2,849.934

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
13
 14

TABLE 7 Post-GFC perspective

Variable 1 2 3 4 5 6 7 8 9 10 11
+
er 1.643*** 2.892*** 1.122*** 3.082*** 0.554*** 0.792*** 1.398*** 0.442* 1.243*** 1.949*** 0.597***
(0.482) (0.352) (0.229) (0.308) (0.145) (0.163) (0.177) (0.252) (0.341) (0.342) (0.197)
−
er −1.041** −0.223 0.134 0.806*** 1.076*** 0.861*** 0.733*** 0.689** 0.0575 0.617** 0.506***
(0.420) (0.282) (0.181) (0.245) (0.120) (0.130) (0.145) (0.285) (0.304) (0.272) (0.186)
Δer 0.327*** 0.615*** 0.724*** 0.766***
(0.079) (0.050) (0.103) (0.093)
+
Δer −0.131 0.0558 −0.812*** 0.399*** 0.330*** 0.104 −0.175**
(0.096) (0.151) (0.116) (0.075) (0.106) (0.072) (0.0689)
Δer− 1.317*** 1.262*** 1.782*** 1.077*** 0.704*** 1.149*** 0.543***
(0.209) (0.171) (0.206) (0.149) (0.100) (0.114) (0.0802)
^ξt − 1 −0.076*** −0.085*** −0.090*** −0.112*** −0.131*** −0.101*** −0.105*** −0.165*** −0.092*** −0.096*** −0.125***
(0.0081) (0.0059) (0.0075) (0.0119) (0.0062) (0.0095) (0.0063) (0.0103) (0.0059) (0.0050) (0.0111)
Constant – – – – – – – – – – –
 2
Hausman test χ k −3.97(0.1424) −0.81(0.1141) 2.21(0.3317) 3.50(0.1736) 1.76(0.4153) 2.58(0.2725) 4.52(0.1046) 5.84(0.0539) 2.11(0.3481) 2.19(0.3352) 9.42(0.0090)
WSR F − stat 27.41(0.0000) 24.02(0.0000) 1.06(0.3032) 74.09(0.0000) 16.89(0.0000) 13.68(0.0002) 4.54(0.0332) 23.74(0.2374) 0.37(0.5435) 2.26(0.1330) 45.34(0.0000)
WLR F − stat 23.60(0.0000) 78.06(0.0000) 2.74(0.0979) 55.23(0.0000) 12.97(0.0003) 16.59(0.0000) 21.48(0.0000) 92.56(0.0000) 10.82(0.0010) 3.51(0.0610) 35.98(0.0000)
Log likelihood 1,735.375 4,453.21 2,676.671 2,576.294 8,192.512 3,988.968 5,095.914 2,431.098 1,830.573 2,634.97 5,165.282

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
SALISU ET AL.
 SALISU ET AL.

TABLE 8 Quantitative easing (QE) perspective

Variable 1 2 3 4 5 6 7 8 9 10 11
er+ −1.502*** −1.425*** −0.763*** 1.032*** −2.412*** −2.318*** −1.298*** −3.527*** −0.598*** −7.058*** −1.048***
(0.253) (0.228) (0.131) (0.357) (0.173) (0.441) (0.145) (0.164) (0.199) (1.855) (0.162)
−
er 1.459*** 2.179*** 0.731*** 4.570*** 3.645*** 3.078*** 2.215*** 3.243*** 1.405*** 14.88*** 1.364***
(0.389) (0.361) (0.197) (0.860) (0.281) (0.463) (0.224) (0.257) (0.304) (3.424) (0.249)
Δer 0.255*** 0.313***
(0.060) (0.037)
+
Δer −0.0253 −0.273*** −0.415*** 0.030 −0.243*** 0.114 −0.268*** 0.108 −0.258***
(0.0976) (0.090) (0.066) (0.058) (0.056) (0.078) (0.084) (0.127) (0.061)
Δer− 0.890*** 0.964*** 1.178*** 0.832*** 0.993*** 0.616*** 1.183*** 1.000*** 0.471***
(0.155) (0.134) (0.133) (0.118) (0.090) (0.123) (0.170) (0.155) (0.062)
QE_1 0.055*** 0.081*** 0.011** 0.056*** 0.087*** 0.022*** 0.054*** 0.076*** 0.042*** 0.110*** 0.020***
(0.009) (0.009) (0.004) (0.011) (0.007) (0.005) (0.003) (0.006) (0.010) (0.008) (0.004)
QE_2 0.088*** 0.095*** 0.019*** 0.089*** 0.094*** 0.035*** 0.066*** 0.106*** 0.046*** 0.124*** 0.030***
(0.014) (0.012) (0.005) (0.015) (0.005) (0.009) (0.004) (0.012) (0.012) (0.007) (0.005)
QE-3 0.126*** 0.119*** 0.047*** 0.110*** 0.129*** 0.072*** 0.085*** 0.108*** 0.069*** 0.128*** 0.032***
(0.016) (0.015) (0.006) (0.017) (0.007) (0.013) (0.007) (0.013) (0.020) (0.009) (0.008)
^ξt − 1 −0.082*** −0.075*** −0.098*** −0.084*** −0.065*** −0.084*** −0.080*** −0.095*** −0.092*** −0.021*** −0.075***
(0.014) (0.007) (0.009) (0.006) (0.006) (0.006) (0.0049) (0.009) (0.009) (0.002) (0.006)
 2
Hausman test χ k 4.20(0.1226) 1.71(0.4215) 0.41(0.8156) 10.08(0.0065) 2.94(0.2304) 163.68(0.0000) 2.75(0.2530) 8.83(0.0121) 0.83(0.6590) 1.43(0.4881) 3.78(01511)
WSR F − stat 16.18(0.0001) 48.78(0.0000) 0.58(0.4464) 82.63(0.0000) 29.44(0.0000) 0.09(0.7653) 113.01(0.0000) 9.17(0.0025) 44.61(0.0000) 12.59(0.0004) 50.15(0.0000)
WLR F − stat 26.46(0.0000) 45.97(0.0000) 25.55(0.0000) 15.41(0.0001) 208.71(0.0000) 163.68(0.0000) 110.97(0.0000) 315.97(0.0000) 19.62(0.0000) 17.94(0.0000) 41.89(0.0000)
Log likelihood 2,673.01 6,949.63 6,751.44 4,279.65 13,575.3 10,812.4 12,497.0 7,454.35 4,340.07 5,495.77 7,572.77

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
15
 16

TABLE 9 The role of macroeconomic in stock return–exchange rate nexus

Variable 1 2 3 4 5 6 7 8 9 10 11
er −0.305* −0.186
(0.169) (0.280)
+
er 0.932 0.375 1.238*** −1.534** 1.865*** 2.072*** −0.0704 2.519*** 1.986***
(0.973) (0.509) (0.290) (0.606) (0.229) (0.479) (0.503) (0.421) (0.203)
er− −0.332 0.146 −0.121 1.797** −0.862*** −0.261 −1.345*** 1.097*** −0.116
(0.736) (0.208) (0.130) (0.751) (0.100) (0.467) (0.386) (0.178) (0.153)
y – – – – – – – – – – –
Δer 0.359***
(0.039)
+
Δer −0.132 −0.388*** 0.120 0.470*** −0.0648 −0.311*** −0.0965 −0.309*** −0.0837 −0.271***
(0.100) (0.092) (0.104) (0.164) (0.058) (0.0565) (0.0818) (0.0920) (0.114) (0.0645)
−
Δer 1.082*** 1.155*** 0.442*** −1.136*** 1.058*** 1.130*** 0.798*** 1.271*** 1.213*** 0.530***
(0.152) (0.129) (0.120) (0.216) (0.121) (0.0876) (0.110) (0.175) (0.151) (0.0560)
Δy – – – – – – – – – – –
^ξt − 1 −0.076*** −0.061*** −0.077*** −0.152*** −0.076*** −0.096*** −0.089*** −0.099*** −0.086*** −0.071*** −0.111***
(0.0148) (0.0041) (0.0068) (0.0208) (0.0059) (0.0074) (0.0055) (0.0077) (0.0130) (0.0048) (0.0106)
Constant – – – – – – – – – – –
 
Hausman test χ 2k 10.13(0.0175) 1.18(0.7581) 3.31(0.3461) 0.97(0.8076) 5.11(0.1636) 13.06(0.0045) −16.90(0.0000) 11.95(0.0076) −1.02(0.0002) 2.78(0.4266) −5.94(0.0444)
WSR F − stat 28.81(0.0000) 84.42(0.0000) 2.89(0.0894) 21.84(0.0000) 55.78(0.0000) 0.99(0.3190) 164.99(0.0000) 31.58(0.0000) 56.54(0.0000) 31.15(0.0000) 77.26(0.0000)
WLR F − stat 11.80(0.0006) 11.40(0.0007) 8.97(0.0028) 7.53(0.0061) 8.10(0.0044) 10.89(0.0010) 0.06(0.8069) 36.75(0.0000) 2.41(0.1203) 19.85(0.0000) 5.47(0.0193)
Log likelihood 2,638.957 6,829.276 6,698.495 1,017.827 13,325.03 10,628.35 12,352.46 7,339.539 4,264.051 5,398.144 7,553.486

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
SALISU ET AL.
 SALISU ET AL.

TABLE 10 Using alternative data frequency (i.e., quarterly frequency)

Variable 1 2 3 4 5 6 7 8 9 10 11
er −0.344** −0.604*** −0.0722
(0.169) (0.126) (0.210)
+
er −0.457 0.952*** −0.0371 3.116*** −1.336*** −0.0450 0.203 1.388***
(0.875) (0.306) (0.215) (0.639) (0.177) (0.617) (0.405) (0.302)
er− −2.373*** −2.365*** −1.000*** −0.552 0.242 −1.123** −1.468*** −1.081***
(0.767) (0.414) (0.285) (1.374) (0.238) (0.484) (0.554) (0.409)
Δer 0.261*** 0.404*** 0.131* 0.555***
(0.067) (0.053) (0.068) (0.115)
+
Δer −0.112 −0.172 −0.819*** 0.0849 −0.480*** 0.196*** −0.180*
(0.188) (0.118) (0.124) (0.071) (0.116) (0.072) (0.098)
−
Δer 1.040*** 0.580*** 1.150*** 0.794*** 0.696*** 0.405*** 0.296***
(0.196) (0.125) (0.172) (0.082) (0.132) (0.114) (0.065)
^ξt − 1 −0.182*** −0.175*** −0.182*** −0.204*** −0.175*** −0.214*** −0.219*** −0.177*** −0.152*** −0.171*** −0.211***
(0.0235) (0.0121) (0.0141) (0.0174) (0.0118) (0.0164) (0.0095) (0.0133) (0.0141) (0.0115) (0.0158)
Constant – – – – – – – – – – –
 2
Hausman test χ k 5.98(0.0504) 2.48(0.2893) 2.09(0.3517) 6.65(0.0359) 3.87(0.1443) 14.79(0.0006) 0.38(0.8273) 0.18(0.9152) 0.62(0.7332) 0.24(0.8865) 16.78(0.0002)
WSR F − stat 8.62(0.0330) 18.21(0.0000) 0.41(0.5208) 53.16(0.0000) 0.25(0.6201) 0.00(0.9733) 53.17(0.0000) 33.17(0.0000) 19.92(0.0000) 2.80(0.0945) 21.94(0.0000)
WLR F − stat 2.71(0.0997) 24.30(0.0000) 4.27(0.0387) 3.71(0.0542) 16.90(0.0000) 20.32(0.0000) 0.04(0.8472) 0.37(0.5431) 3.45(0.0634) 13.89(0.0002) 0.02(0.8995)
Log likelihood 423.631 1,037.346 1,440.716 751.568 2,233.749 1,855.196 2,203.838 1,046.191 796.897 924.2594 1,621.171

Note: The numbers 1–11 in the table represent the eleven (11) sectors in S&P500, such that; 1 = communication service, 2 = consumer discretionary, 3 = consumer staple, 4 = energy, 5 = finan-
cial, 6 = health, 7 = industrial, 8 = ITC, 9 = materials, 10 = real estate, and 11 = utilities. The term W denotes Wald restriction test distributed as χ(5) for testing the null hypothesis of no
asymmetry in the estimate. The subscripts SR and LR denote short run and long run situations, while the values in parentheses are standard errors for the estimates but represent probability
values for the Hausman test and Wald restriction test. For the Hausman test, the PMG estimator is the efficient estimator under the null while the MG estimator is the efficient estimator
under the alternative hypothesis. The asterisks ***, ** and * denote 1%, 5% and 10% levels of significance.
17
18
activity (measured with the growth of industrial produc-
tion index) plays a significant role in the nexus captured,
a look at Table 9 appears to suggest that the level of eco-
nomic activity although may significantly influence stock
returns, but fails to improve the significance and magni-
tude of the asymmetric effects of exchange rate on stock
returns. In passing, our findings on the short run and
long run asymmetric effects of currency depreciation and
appreciation on stock returns yet remain quite similar to
those earlier established without accounting for the role
economic activity.
5.5 | Is the stock return–exchange rate
nexus sensitive to choice of data frequency
As an additional robustness test, we also consider an
alternative data frequency using quarterly frequency in
lieu of monthly observations used in the previous analy-
sis. This analysis is conducted for the sectoral stocks and
the U.S. dollar/euro exchange rate as a sensitivity analy-
sis to the results reported in Table 3. Thus, the regression
results obtained using quarterly data are obtainable in
Table 10. When compared to our earlier results particu-
larly those reported in Table 3, we find that irrespective
of the choice of data frequency under consideration, the
positive effect of currency appreciation on stock returns
remains comparatively more pronounced than the nega-
tive effect of currency depreciation. This inference is par-
ticularly viable both in terms of significant and
magnitude as well as direction of relationship. We also
find the long run estimates to be consistent for both the
monthly and quarterly data frequencies, with both cur-
rency appreciation and depreciation impacting stocks
negatively. On the whole, it is sufficient to submit that
the hypothesis of asymmetric response of stock returns to
changes in exchange rate is not sensitive to the choice of
data frequency.
6 | C O N C L U D IN G R E M A R K S
This study sets off with the aim of investigating the
nonlinear relationship flowing from exchange rates to
stock returns in an analysis of over 300 firms listed in the
S&P 500 across 11 sectors. The first theoretical motiva-
tion for considering exchange rate as a predictor for stock
returns derives from the Arbitrage Pricing theory which
could be employed to specify currency risks as one of the
major risk factors associated with stock returns. On the
direction of impacts, the theories (the flow and monetary
models) disagree on whether the expected sign is positive
or negative while an effort to reach a compromise
SALISU ET AL.
indicates that the sign depends on whether the firm in
question is a heavy importer or exporter. Other theoreti-
cal constructions and empirical findings point to an
asymmetric relationship and conducting a sectoral analy-
sis. Salient features of the data as argued led us to adopt
the Salisu and Isah (2017) nonlinear panel ARDL tech-
nique with which we conduct a panel study and extract
estimates for the individual sectors. In the end, the study
reports robust findings that are insensitive to the choice
of data frequency, the role economic activity and to an
extent, the choice of foreign currency. The study reveals
the presence of asymmetry in the nexus with the submis-
sion that exchange rate depreciation produces predomi-
nantly positive effects while exchange rate appreciation
produces negative effects on stock returns. However, the
positive effects of exchange rate depreciation on the sec-
toral returns overwhelm those of negative impacts of
exchange rate appreciation in magnitude and statistical
significance. On the whole, returns on investment in
U.S. stocks differ significantly between currency appreci-
ation and depreciation and by implication investors seek-
ing to maximize returns need to exercise some level
caution when confronted with sharp swings in exchange
rate particularly during turbulent periods. By way of
extension, it would be an interesting exercise to re-
examine the behaviour of stock return-exchange rate
nexus during pandemics particularly COVID-19 pan-
demic. Another important area for future research is to
investigate whether the impact of exchange rate on the
real economy has been diminishing over the years per-
haps due to globalization, among others.
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are avail-
able on request from the corresponding author. Some of
the data are not publicly available due to privacy or ethi-
cal restrictions.
ORCID
Afees A. Salisu https://orcid.org/0000-0003-0619-6545
ENDN OTE S
1
More extensive review of the empirical literature on exchange rate
and stock prices is rendered in Bahmani-Oskooee and Saha (2015).
Some more can be found in Salisu and Ndako (2018).
2
The Arbitrage Pricing Theory (Ross, 1976) offers a reasonable the-
oretical basis for considering exchange rate as a major risk factor
associated with stock returns.
3
The 11 sectors include financial, industrial, health, information
technology, consumer service, utilities, consumer staple, real
estate, energy, materials and communication sector.
4
USD/Euro exchange rate, USD/British Pounds (GBP) and
USD/Australian dollar (AUD)
SALISU ET AL.
5
See Salisu and Isah (2017) and Salisu and Ndako (2018) for tech-
nical details on both linear and nonlinear panel ARDL models.
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How to cite this article: Salisu AA, Isah K,
Ogbonnaya-Orji N. A firm level analysis of
asymmetric response of U.S. stock returns to
exchange rate movements. Int J Fin Econ. 2020;
1–20. https://doi.org/10.1002/ijfe.2210