Asymmetric Responses of Equity Returns to Changes in Exchange Rates at Different Market Volatility Levels

Document Type

Peer-Reviewed Article

Publication Date



Our study aims to explore interactions between equity market returns and exchange rates at different market risk zones proxied by the Chicago Board Options Exchange Volatility Index (VIX). We analyze comovements between daily S&P 500 returns and three different USD exchange rates: the Federal Reserve's Nominal Broad U.S. Dollar Index, the Nominal Advanced Foreign Economies U.S. Dollar Index, and the USD in euro. The comovements are examined at three VIX zones (low, intermediate, and high) that we identify by employing the self-exciting threshold autoregressive SETAR(2,p) tests on daily data from January 03, 2006 to January 23, 2023. We subsequently employ VAR and conditional least square tests for S&P 500 returns and log changes in USD exchange rates with all showing the most robust transmission of shocks between equity returns and exchange rates in the high VIX zone. We further run Markov switching tests to identify specific jump periods from low to high responsiveness of equity returns to the USD exchange rate. Our tests show that interactions between equity returns and exchange rates are asymmetric, i.e., the exchange rate elasticity of equity returns is pronounced during periods of high market volatility and indiscernible at periods of low volatility. These findings may be useful for forecasting equity returns, exchange rates, as well as for asset pricing and portfolio diversification.


JEL Classification: C58; F31; G15.

Michael D. Herley and Mark Ritter are graduates of the Jack Welch College of Business & Technology at Sacred Heart University DBA in Finance program.