Effect of the Exchange Rates and their Volatilities on the Stock Return of the Banking Industry and Financial Holding Companies
The growth of financial liberalization, technological innovation, and market opening has led the global financial sector to expand its operations. In this study, we examine the effects of the foreign exchange rates and their volatilities on the rate of stock return of the banking industry and four major financial holding companies in Korea. Using a revised GARCH ? M model, we analyzed how the KOSPI yield, exchange rates and their volatilities affect the rate of return of stocks of the banking industry and the four major financial holding companies. To test goal of the paper, we used daily return from 2003 to 2017 for the domestic banking sector and the four largest financial holding companies, the KOSPI return rate and 5 kinds of the foreign exchange rates including USD. Empirical analysis shows that the yield ratio of the KOSPI has the greatest impact on the banking sector and the return of the four major financial holding shares, with the KOSPI earning rate slightly different from the positive for each financial holding. The effect of exchange rates and their volatilities on the stock returns of the banking industry and FHCs was significantly greater than that of interest rates and their volatility. The effect of the US Dollar (USD) and Japanese Yen (JPY) were negatively correlated to banking industry and FHC stock returns. Relatedly, the Chinese Yuan (CNY), European Euro (EUR), and the British Pound (GBP) had a significant effect on certain FHCs.Regarding the effect of exchange rate volatility on stock returns, largely insignificant relationships were found except for the case of a negative correlation between EUR volatility and Woori Financial Group (WRFG). In contrast, positive correlations were observed between exchange rate volatility and stock return volatility in the cases of: (i) CNY, USD and banking industry; (ii) CNY and Shinhan Financial Group (SHFG); and, (iii) USD, CNY, JPY, EUR and HNFG. Further, the exchange rate volatility effects were greatest during the financial crisis relative to the period ante et post. The results of this study on the impact of the foreign exchange rates and their volatilities on the stock returns of the banking sector and the four financial holdings have meaningful implications for financial institutions¡¯ risk management, and investors¡¯ investment decision-making.