Foreign Exchange Market Reaction to the U.S.‐CANADA Free Trade Agreement

Hogan, Kedreth; Sultan, Jahangir

doi:10.1111/j.1475-6803.1994.tb00164.x

Cited by 2 publications

(2 citation statements)

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“…There is a large body of empirical literature on the economic consequences of free trade agreements including studies about the impact of these agreements on international trade flows and equity and foreign exchange markets. Hogan and Sultan (1994) investigate the effect of news about the implementation of the Canada-U.S. Free Trade Agreement and find that information suggesting an increase in the likelihood of FTA diminished exchange rate volatility. Hanson and Song (1998) consider the responses of the U.S. and Mexican stock markets to the announcement that NAFTA had been agreed upon and find no significant effect on the returns to investing in the U.S. firms, while the effect on the Mexican stock returns is positive.…”

Section: B Empirical Literature On Ftas and Equity And Foreign Exchamentioning

confidence: 99%

“…There is an extensive empirical literature on the economic consequences of free trade agreements including studies about the impact of these agreements on international trade flows (e.g., Baier andBergstrand 2009, Calvo-Pardo, Freund, andOrnelas 2009), their effect on currency markets (e.g., Krishnapilla and Thompson 2011, Marmolejo 2011, Hogan and Sultan 1994, and their effect on equity markets (e.g., Ewing, Payne, and Sowell 2001, Aggerwal and Kyaw 2005, Darrat and Zhong 2005, and Nezerwe 2014. A separate issue that has been researched widely is the relationship between exchange rates and returns in stock markets (e.g., Mun 2007, Du and Hu 2012a, 2012b, Walid, Chaker, Masood, and Fry 2011, Eissa, Chortareas, and Cipollini 2010.…”

Section: Introductionmentioning

confidence: 99%

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Free Trade Agreements and Volatility of Stock Returns and Exchange Rates: Evidence from NAFTA

2017

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2This paper uses GARCH models and daily data to investigate the effect of the Canada -U.S. Free Trade Agreement (CUSFTA) and NAFTA on the volatility of, and the relationship between stock market returns and changes in bilateral exchange rates of the member countries. Empirical results indicate that the CUSFTA had a stabilizing effect on the Canadian and U.S. equity markets while increasing the volatility of the CAD/USD exchange rate. NAFTA further reduced the two stock markets' volatility, however unlike CUSFTA, NAFTA also reduced the volatility of the CAD/USD exchange rate. Additional results indicate that during NAFTA, the Mexican stock market is more volatile than the other stock and bilateral exchange markets. Moreover, the exchange rate of the Mexican peso against both the U.S. and Canadian dollars has been more volatile than the Canadian dollar/US dollar exchange rate. Evidence also suggests that all three stock markets are positively correlated with each other with the U.S. market being much less correlated with the Canadian and Mexican stock markets than the latter two markets are correlated with each other. Evidence found in this paper suggests a negative relationship between the stock and bilateral currency markets that is statistically significant except for the U.S. equity market when paired with an exchange rate that involves the Mexican peso. 1 Corresponding author. 2 We thank two anonymous referees for offering valuable suggestions. AbstractThis paper uses GARCH models and daily data to investigate the effect of the Canada -U.S. Free Trade Agreement (CUSFTA) and NAFTA on the volatility of, and the relationship between stock market returns and changes in bilateral exchange rates of the member countries. Empirical results indicate that the CUSFTA had a stabilizing effect on the Canadian and U.S. equity markets while increasing the volatility of the CAD/USD exchange rate. NAFTA further reduced the two stock markets' volatility, however unlike CUSFTA, NAFTA also reduced the volatility of the CAD/USD exchange rate. Additional results indicate that during NAFTA, the Mexican stock market is more volatile than the other stock and bilateral exchange markets. Moreover, the exchange rate of the Mexican peso against both the U.S. and Canadian dollars has been more volatile than the Canadian dollar/US dollar exchange rate. Evidence also suggests that all three stock markets are positively correlated with each other with the U.S. market being much less correlated with the Canadian and Mexican stock markets than the latter two markets are correlated with each other. Evidence found in this paper suggests a negative relationship between the stock and bilateral currency markets that is statistically significant except for the U.S. equity market when paired with an exchange rate that involves the Mexican peso. 1.

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Section: B Empirical Literature On Ftas and Equity And Foreign Exchamentioning

confidence: 99%