The Effect of Foreign Exchange Rate Volatility on Sectoral Stock Return Volatility: Evidence from the Australian Stock Market

This paper investigates the influence of volatility of foreign exchange rate of the U.S., the U.K., Eurozone, Japan, and Singapore against the volatility of six Australian sectors for the given investigation period by controlling the periods of global financial crisis 2007-2008. The volatility in this study is estimated using GARCH (1,1) models. The daily data is collected from the period of 2002 to 2014 while the dataset is divided into three sub-periods: before GFC (July 2002 to July 2007), during GFC (July 2007 to July 2009), and after GFC (July 2009 to July 2014). The estimated results show a weak relationship exists between exchange rates of the five countries and the volatility of six Australian sectors, except for the IT sector during GFC. The same relationship is evident before GFC, except for the financial sector. The statistically significant impact of these foreign exchanges on the six Australian sectors continues after GFC, except for the materials sector, which is significantly weak.

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