×

zbMATH — the first resource for mathematics

Free trade agreements and volatility of stock returns and exchange rates: evidence from NAFTA. (English) Zbl 1412.91092
Summary: This paper uses GARCH models and daily data to investigate the effect of the Canada – U.S. Free Trade Agreement (CUSFTA) and NAFTA on the volatility of, and the relationship between stock market returns and changes in bilateral exchange rates of the member countries. Empirical results indicate that the CUSFTA had a stabilizing effect on the Canadian and U.S. equity markets while increasing the volatility of the CAD/USD exchange rate. NAFTA further reduced the two stock markets’ volatility, however unlike CUSFTA, NAFTA also reduced the volatility of the CAD/USD exchange rate. Additional results indicate that during NAFTA, the Mexican stock market is more volatile than the other stock and bilateral exchange markets. Moreover, the exchange rate of the Mexican peso against both the U.S. and Canadian dollars has been more volatile than the Canadian dollar/US dollar exchange rate. Evidence also suggests that all three stock markets are positively correlated with each other with the U.S. market being much less correlated with the Canadian and Mexican stock markets than the latter two markets are correlated with each other. Evidence found in this paper suggests a negative relationship between the stock and bilateral currency markets that is statistically significant except for the U.S. equity market when paired with an exchange rate that involves the Mexican peso.

MSC:
91B60 Trade models
91B64 Macroeconomic theory (monetary models, models of taxation)
62P20 Applications of statistics to economics
PDF BibTeX XML Cite
Full Text: DOI
References:
[1] Aggarwal, Industry differences in NAFTA impact on valuation of US companies, Int Rev Financ Anal, 7, 137-153, (1998)
[2] Aggarwal, R.; Kyaw, NA, Equity market integration in the NAFTA region: evidence from unit root and Cointegration tests, Int Rev Financ Anal, 4, 393-406, (2005)
[3] Ajayi, RA; Mougoué, M., On the dynamic relation between stock prices and exchange rates, J Financ Res, XIX, 193-207, (1996)
[4] Arndt, S., Review essay: north American free trade: an assessment, Open Econ Rev, 7, 77-92, (1996)
[5] Bahmani-Oskooee, M.; Sohrabian, A., Stock prices and the effective exchange rate of the dollar, Appl Econ, 24, 459-464, (1992)
[6] Baier, SL; Bergstrand, JH, Bonus Vetus OLS: a simple method for approximating international trade-cost effects using the gravity equation, J Int Econ, 77, 77-85, (2007)
[7] Basu, P.; Morey, MR, Trade opening and the behavior of emerging stock market prices, J Econ Integr, 20, 68-92, (2005)
[8] Bera AK, Kim S (1996) Testing constancy of correlation with an application to international equity returns. The University of Illinois at Urbana-Champaign
[9] Bodart, V.; Reding, P., Exchange rate regime, volatility and international correlations on bond and stock markets, J Int Money Financ, 18, 133-151, (1999)
[10] Bolerslev, T.; Engle, RF; Woodridge, JM, A capital asset pricing model with time- varying Covariances, J Polit Econ, 96, 116-131, (1988)
[11] Bollerslev T (1986) Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics (31):307-327 · Zbl 0616.62119
[12] Bollerslev, T., Modelling the coherence in short-run nominal exchange rates: a multivariate generalized Arch model, Rev Econ Stat, 72, 498-505, (1990)
[13] Calvo-Pardo H, Freund C, Ornelas E (2009) The ASEAN free trade agreement: impact on trade flows and external trade barriers. Center for Economic Performance, Discussion Paper No 930, London School of Economics and Political Science, London
[14] Caporin, M.; McAleer, M., Ten things you should know about the dynamic conditional correlation representation, Econometrics, 1, 116-126, (2013)
[15] Daniels, JP; O’Brien, P.; Ruhr, M., Bilateral tax treaties and US foreign direct investment financing modes, Int Tax Public Financ, 22, 999-1027, (2015)
[16] Darrat, AF; Zhong, M., Equity market linkage and multinational trade accords: the case of NAFTA, J Int Money Financ, 24, 793-817, (2005)
[17] Du, D.; Hu, O., Exchange rate risk in the U.S. stock market, J Int Finan Markets Inst Money, 22, 137-150, (2012)
[18] Du, D.; Hu, O., Foreign exchange volatility and stock returns, J Int Financ Mark Inst Money, 22, 1202-1216, (2012)
[19] Eissa, MA; Chortareas, G.; Cipollini, A., Stock returns and exchange rate volatility spillovers in the MENA region, J Emerg Mark Fin, 9, 257-284, (2010)
[20] Engle, RF, Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional Heteroskedasticity models, J Bus Econ Stat, 20, 339-350, (2002)
[21] Engle, RF; Kroner, KF, Multivariate simultaneous generalized ARCH, Economet Theor, 11, 122-150, (1995)
[22] Eun, CS; Shim, S., International transmission of stock market movements, J Financ Quant Anal, 24, 241, (1989)
[23] Ewing, BT; Payne, JE; Sowell, C., NAFTA and north American stock market linkages: an empirical note, N Am J Econ Finance, 10, 443-451, (1999)
[24] Ewing, BT; Payne, JE; Sowell, C., Transmission of Conditional Stock Return Volatility across North American Markets: Evidence from Pre- and Post-NAFTA, Int Trade J, XV, 409-427, (2001)
[25] Feinberg, SE; Keane, MP, U.S.-Canada trade liberalization and MNC production location, Rev Econ Stat, 83, 118-132, (2001)
[26] Gallagher K, Anderson S, Viterbo A (2013) Capital flow management and the trans-pacific partnership agreement. G-24 Policy Brief No. 79
[27] Hamao, Y.; Masulis, RW; Ng, V., Correlations in price changes and volatility across international stock markets, Rev Financ Stud, 3, 281-307, (1990)
[28] Hanson, RC; Song, MH, Shareholder wealth effects of free trade: U.S. and Mexican stock market response to NAFTA, Int Rev Econ Financ, 7, 209-224, (1998)
[29] Hau, H., Real exchange rate volatility and economic openness: theory and evidence, J Money, Credit, Bank, 34, 611-630, (2002)
[30] Hogan, K.; Sultan, J., Foreign Exchange Market Reaction to the U.S.-Canada Free Trade Agreement, J Financ Res, XVII, 539-549, (1994)
[31] Hutchinson, M.; Nourzad, F., An Empirical Inquiry into the Structure of International Stock Market Interdependence, J Appl Econ, III, 35-46, (2004)
[32] Kanas, A., Is exchange rate volatility influenced by stock return volatility? Evidence from the US, the UK, and Japan, Appl Econ Lett, 9, 501-503, (2002)
[33] Kennedy, K.; Nourzad, F., Exchange rate volatility and its effect on stock market volatility, Int J Hum Cap Urban Manag, 1, 37-46, (2016)
[34] Kim, S.; Kim, S.; Wang, Y., Macroeconomic effects of capital account liberalization: the case of Korea, Rev Dev Econ, 8, 624-639, (2004)
[35] Klein, L.; Coutiño, A., The Mexican financial crisis of December 1994 and lessons to be learned, Open Econ Rev, 7, 501-510, (1996) · Zbl 0900.90060
[36] Krishnapilla, S.; Thompson, H., Exchange rates, free trade agreement and bilateral trade valances of Sri Lanka, Indian J Econ Bus, 10, 163-171, (2011)
[37] Lee, SJ, Volatility spillover effects among six Asian countries and the United States, Appl Econ Lett, 16, 501-508, (2009)
[38] Manchester, J.; McKibbin, W., The global macroeconomics of NAFTA, Open Econ Rev, 6, 203-223, (1995)
[39] Marmolejo, AL, Effects of a free trade agreement on the exchange rate pass-through to import prices, Rev Int Econ, 19, 475-493, (2011)
[40] Mun, KC, Volatility and correlation in international stock markets and the role of exchange rate fluctuations, J Int Financ Mark Inst Money, 17, 25-41, (2007)
[41] Nezerwe, Y., Southern African development community free trade agreement impact on South Africa stock returns, Glob J Bus Res, 8, 57-63, (2014)
[42] Nieh, CC; Lee, CF, Dynamic relationship between stock prices and exchange rates for G-7 countries, Q Rev Econ Finance, 41, 477-490, (2001)
[43] Panton, DB; Lessig, PV; Joy, MO, Comovements of international equity markets: a taxonomic approach, J Financ Quant Anal, 11, 415-432, (1976)
[44] Peter, A., Bilateral Trade, Openness, and Asset Holdings, Open Econ Rev, 23, 713-740, (2012)
[45] Phengpis, C.; Swanson, PE, Portfolio diversification effects of trading blocks: the case of NAFTA, J Multinat Financ Manage, 16, 315-331, (2006)
[46] Reinhart CM, Rogoff KS (2009) This time is different: eight centuries of financial folly. Princeton University Press, Princeton
[47] Rodriguez, P., Investors expectations and NAFTA, Rev Int Econ, 11, 206-218, (2003)
[48] Tabak, BM, The dynamic relationship between stock prices and exchange rates: evidence from Brazil, Int J Theor Appl Finance, 9, 1377-1396, (2006) · Zbl 1134.91531
[49] Taylor, MP; Tonks, I., The internationalisation of stock market returns and the abolition of U.K. exchange rate control, Rev Econ Stat, 71, 332-336, (1989)
[50] Thompson AJ (1994) Canada-United States free trade and investment. The World Economy 17(1):63-74
[51] Tse, YK; Tsui, AK, A multivariate generalized autoregressive conditional heteroscedasticity model with time-varying correlations, J Bus Econ Stat, 20, 351-362, (2002)
[52] U.S. and Canadian Governments (1988) The Canada - US free trade agreement
[53] Walid, C.; Chaker, A.; Masood, O.; Fry, J., Stock market volatility and exchange rates in emerging countries: a Markov-state switching approach, Emerg Mark Rev, 12, 272-292, (2011)
[54] Yang, SY; Doong, SC, Price and volatility spillovers between stock prices and exchange rates: empirical evidence from the G-7 countries, Int J Bus Econ, 3, 139-153, (2004)
[55] Zhao, H., Dynamic relationship between exchange rate and stock price: evidence from China, Res Int Bus Financ, 24, 103-112, (2010)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.