1 Federal Housing Finance Agency, Washington, DC 20006, USA

2 Economics Department, Marquette University Milwaukee, WI 53201-1881, USA


This paper investigates empirically the effect of volatility of the exchange rate of the U.S. dollar vis-à-vis the euro on U.S. stock market volatility while controlling for a number of drivers of stock return volatility. Using a GARCH(1, 1) model and using weekly data covering the period from the week of January 1, 1999 through the week of January 25, 2010, it is found that the 9/11 terrorist attack, bear markets, fluctuations in jobless claims, and negative equity market returns increase financial volatility. On the other hand, no conclusive results are found regarding the effect of fluctuations in M2, or incorrect expectations of changes in the federal funds target rate. Finally, it is found that when major drivers of financial volatility are controlled for, increased exchange rate volatility exerts a positive and statistically significant effect on the volatility of stock returns. Monetary policymakers need to take this effect into account when formulating exchange rate actions within the prevailing managed float.


Adjasi , C.; Harvey, S.K.; Daniel A., (2008). Effect of exchange rate volatility on the Ghana Stock Exchange. African J. Account.Econ. Financ. Bank. Res. 3(3): 561-570 (10 pages).

Ahn, E.; Jin, L. (2006) Volatility relationship between stock performance and real output. Appl. Financ. Econo., 16(11): 777-784 (8 pages).

Arratibel, O.; Henrike, M., (2014). The Impact of monetary policy and exchange rate. Shocks in Poland: Evidence form a time-varying VAR. European Central Bank Working Paper Series no 1636.

Bae, J.; Kim, C.-J.; Charles, N., (2007). Why are stock returns and volatility negatively correlated? J. Empirical Financ., 14(1): 41-58 (18 pages).

Beltratti, Morana, A.C., (2004) Breaks and persistency: Macroeconomic causes of stock market volatility. J. Econom., 131(1-2): 151-177 (27 pages).

Bernanke, B.; Kuttner, K., (2004). What explains the stock market’s reaction to federal reserve policy?” National Bureau of Economics Research Working Paper.

Calhoun, J.; Kurkiewicz, A.; Nourzad, F., (2012). Federal Funds Futures, risk premium, and monetary policy actions. Appl. Financ. Econom., 22(16): 1317-1330 (14 pages).

Chen, Y.-F.; Funke, M., (2009). Booms, recessions and financial turmoil: A fresh look at investment decisions under cyclical uncertainty. Economic Studies, working paper.

Chulia, H.; Climent, F.; Soriano, P.; Torro. H., (2009). Volatility transmission patterns and terrorist attacks. Quant. Financ., 9(5): 607-619 (13 pages).

Cunado, J.; Gil-Alana, L.; Gracia, P., (2009). US stock market volatility persistence: Evidence before and after the burst of the IT bubble. Rev. Quant. Financ. Account., 33(3): 233-252 (20 pages). 

Dawson, P.; Staikouras, H., (2009).  The impact of volatility derivatives on S and P500 volatility. J.Futures Markets, 29(12): 1190-1213 (24 pages).

Engle, R., (2003).Risk and volatility: Econometric models and financial practice: Nobel Lecture. Collective volume article.

Erdal, B. (2001). Investment decisions under real exchange rate uncertainty. The Central Bank of the Republic of Turkey.

Francesco, G., (2008). European Central Bank and Federal Reserve USA: Monetary policy effects on the returns volatility of the Italian Stock Market Index Mibtel,” MPRA.

Kamaly, A.; Tooma, E., (2009). Calendar anomalies and stock market volatility in selected arab stock exchanges.  Appl. Financ. Econom., 19(10-12): 881-892 (12 pages).

Kim, S.-J.; Nguyen, D.Q.T., (2007). The reaction of the Australian financial markets to the interest rate news from the reserve Bank of Australia and the US Fed. Res. Int. Bus. Financ., 22(3): 378–395 (18 pages).

Lawal, M.; Ijirshar, U.V., (2015). Empirical analysis of exchange rate and Nigeria stock market performance. Int. J. Sci. Res., 4(4): 1592-1600 (9 pages).

Lim, S.Y.; Sek, S.K., (2014). Exploring the inter-relationship between the volatilities of exchange rate and stock return.  Procedia Econom. Financ., 14: 367–376 (10 pages).

Muellery, P.; Alirezaand, T.S.;  Vedolinx, A., (2015). Exchange rates and monetary policy uncertainty, Columbia Business School Working Paper Series, Columbia University.

Subair, K.; Salihu, O., (2004). Exchange rate volatility and the stock market: The Nigerian experience. Working paper, Kwara State University.



International Journal of Human Capital in Urban Management (IJHCUM) welcomes letters to the editor for the post-publication discussions and corrections which allows debate post publication on its site, through the Letters to Editor. Letters pertaining to manuscript published in IJHCUM should be sent to the editorial office of IJHCUM within three months of either online publication or before printed publication, except for critiques of original research. Following points are to be considering before sending the letters (comments) to the editor.

[1] Letters that include statements of statistics, facts, research, or theories should include appropriate references, although more than three are discouraged.

[2] Letters that are personal attacks on an author rather than thoughtful criticism of the author’s ideas will not be considered for publication.

[3] Letters can be no more than 300 words in length.

[4] Letter writers should include a statement at the beginning of the letter stating that it is being submitted either for publication or not.

[5] Anonymous letters will not be considered.

[6] Letter writers must include their city and state of residence or work.

[7] Letters will be edited for clarity and length.