Impact of the Exchange Rate Movement to Individual Stock Return Volatility: A Case Study of the Property Sector in Thailand

Abstract

As professional investors attempt to understand volatility of the stocks in portfolio risk management, exchange rate is considered as one of the most important economic indicators that can significantly impact on the portfolio risk exposure by several reasons. Therefore, this study investigates the effect of major exchange rate volatilities including THB/USD, THB/EUR, and THB/JPY on single stock return fluctuations with a case study of top 10 most value traded stocks in property sector listed in the Stock Exchange of Thailand. These were examined from the year 2012 to 2014 in daily basis. In order to fulfill each of examined regressions, ARMA model is applied as the mean equation to estimate conditional volatility by GARCH typed models. Interestingly, the regression result shows that 80% of stocks return volatilities have been significantly affected by THB/USD currency fluctuation with negative correlation. In contrast, 40% and 50% of the samples have been positively influenced by the volatilities of THB/EUR and THB/JPY exchange rates respectively excepting the relationship between the volatilities of THB/EUR exchange rate and RML stock return fluctuation which is found negative.