Currency devaluation and stock market response: An empirical analysis

Dilip K. Patro, John K. Wald, Yangru Wu

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

We study local stock market reaction to currency devaluation by a country's central bank. Devaluations appear to be anticipated by the local stock markets, and there are significant negative abnormal returns even one year prior to the announcement of the devaluation. A negative trend in stock returns persists for up to one quarter following the first announcement, and then becomes positive thereafter, suggesting a reversal. We explore whether changes in macroeconomic variables prior to currency devaluations are related to abnormal stock returns. We find that stock returns are significantly lower if the devaluation is larger and if the country is a developing nation. Furthermore, stock markets decline more around devaluations if reserves are lower, if the real exchange rate has depreciated over the prior years, if the capital account has declined, if the current account deficit has gone up, or if the country credit rating has deteriorated.

Original languageEnglish (US)
Pages (from-to)79-94
Number of pages16
JournalJournal of International Money and Finance
Volume40
DOIs
StatePublished - Feb 2014

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Currency devaluation
  • Macroeconomic factors
  • Stock market response

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