The effect of exchange rate shocks on the volatility of Australian sector excess returns: a note

The study uses GARCH-M methodology to examine the effect of exchange rate s hocks on the volatility of excess returns for the nineteen sectors of the A ustralian stock market. The data covers the period December 1979 through Ap ril 1994. The evidence suggests that news on exchange rates can improve the volatility forecasts of certain Australian stock market sector excess retu rns. The findings have implications for the professional investor looking t o diversify risk and, in addition, give some support to asset pricing model s that place information on the state of the economy as central to the proc ess determining equity returns.