Abstract
The phenomenon of a non-random negative trend in stock prices is usually explained on the macroeconomic level, either by constantly rising risk premia or by a trend in other macroeconomic factors that affect the stock market as a whole. In this paper it is argued that a negative trend in individual stock prices can be caused by a firm-level peso problem related to devaluation expectations. If the devaluation-risk-related peso problem hypothesis is correct, the share prices of companies with a higher foreign exchange rate exposure should react more strongly to the phenomenon than the stock prices of firms with a lower level of exposure. Cross-sectional regression analysis on the individual firm level is used to test for the hypothesis. Empirical findings based on Finnish data from the period 1989 through 1992 strongly support the proposed hypothesis.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call