Market, exchange rate and interest rate risks of German financial and non-financial companies. Industry-Level Analysis

Table of Contents

• 1. Introduction
  • 1.1. Objectives of the study
  • 1.2. Structure of the study
• 2. Literature review
  • 2.1. Empirical evidence of Exchange Rate exposure
  • 2.2. Impact of the Euro on European stock returns
  • 2.3. Empirical evidence of interest rate exposure
  • 2.4. Market, Interest Rate and Exchange Rate risks
• 3. Methodology
  • 3.1. Research methodology
    • 3.1.1. Data Description
    • 3.1.1.1. Procedure
    • 3.1.1.2. Sample period
    • 3.1.1.3. Data analysis and interpretation
  • 3.2. Research strategies
    • 3.2.1. General methodology
    • 3.2.2. Hypotheses and the Theoretical Methodology
      • 3.2.2.1. Theoretical model
      • 3.2.2.2. Implementing methodology
• 4. Results
  • 4.1. Correlation among Variables
  • 4.2. Regression Results
    • 4.2.1. Exchange Rate Exposure Analysis
    • 4.2.2. Exchange Rate and Interest Rate Exposure Analysis
    • 4.2.3. Exposure Analysis to Market, Exchange Rate and Interest Rate
• 5. Conclusion
  • 5.1. Limitations
  • 5.2. Recommendations

Objectives & Thematic Areas

This paper fundamentally aims to investigate the impact of market, exchange rate, and interest rate risks on the stock returns of German financial and non-financial companies at an industry level. The primary research questions explore whether German stock returns are sensitive to these financial variables and if this exposure differs across various industries in Germany, particularly following the introduction of the Euro.

• German stock market analysis
• Exchange rate exposure
• Interest rate risk sensitivity
• Impact of the Euro on stock returns
• Industry-level financial risk assessment
• Application of OLS regression models

Excerpt from the Book

Summary of Chapters

1. Introduction: This chapter sets the stage for the study, highlighting the importance of stock markets and the sensitivity of company stock prices to market, exchange rate, and interest rate risks, especially for German financial and non-financial firms after the euro's introduction. It outlines the research objectives and questions to be addressed.

2. Literature review: This section provides a comprehensive overview of existing empirical literature concerning the relationship between stock returns and market, exchange rate, and interest rate risks, with a specific focus on the impact of the euro on European stock returns and evidence of interest rate exposure.

3. Methodology: This chapter details the research methodology, including the use of secondary data from DataStream International for German financial and non-financial companies from 2001-2008, the deductive research approach, and the specific theoretical models (OLS regression) and hypotheses developed to test the impact of financial variables on stock returns.

4. Results: This section presents the empirical findings from the correlation and regression analyses, discussing the exposure of German individual firms and industry portfolios to exchange rate, interest rate, and market risks, comparing these results with prior studies, and examining the effects after the introduction of the euro.

5. Conclusion: The concluding chapter summarizes the study's main findings, particularly regarding the varying sensitivity of German stock returns to market, interest rate, and exchange rate risks at firm and industry levels, discusses the study's limitations, and offers recommendations for future research.

Keywords

Market risk, Exchange rate risk, Interest rate risk, German companies, Financial institutions, Non-financial institutions, Stock returns, Industry-level analysis, Euro, OLS regression, Macroeconomic factors, Equity valuation, Empirical study, Risk exposure.

Frequently Asked Questions

What is this paper fundamentally about?

This paper fundamentally investigates how market, exchange rate, and interest rate risks affect the stock returns of German financial and non-financial companies, analyzing these relationships at an industry level, particularly in the post-euro introduction period.

What are the central thematic areas?

The central thematic areas include the analysis of stock market sensitivity to various financial risks (market, exchange rate, interest rate), the specific context of the German economy, the impact of the Euro on currency risk, and the comparison of risk exposure across different industries.

What is the primary objective or research question?

The primary objective is to determine if German financial and non-financial institutions' stock returns are sensitive to changes in exchange rates, interest rates, and market returns, and if this sensitivity varies across different German industries.

Which scientific method is used?

The study primarily employs a deductive research approach, relying on secondary data and Ordinary Least Squares (OLS) regression models to test hypotheses regarding the impact of financial variables on stock returns.

What is covered in the main part?

The main part of the paper covers an extensive literature review on financial risks, details the research methodology including data description and theoretical models, presents the empirical results from correlation and regression analyses on exchange rate, interest rate, and market exposure, and concludes with findings, limitations, and recommendations.

Which keywords characterize the work?

Key terms characterizing this work include market risk, exchange rate risk, interest rate risk, German companies, stock returns, industry-level analysis, Euro, OLS regression, and macroeconomic factors.

How does the introduction of the Euro impact exchange rate risk for German companies in this study?

The study suggests that the introduction of the Euro led to a reduction in currency risk in the German stock market, evidenced by a decline in the proportion of industries showing significant exchange rate exposure compared to pre-Euro periods.

Are German financial or non-financial institutions more sensitive to interest rate changes according to the findings?

The study finds that financial institutions are generally more sensitive to changes in the level of interest rates than non-financial corporations, although both industry levels (financial and non-financial) are affected by interest rate changes.

What are the main limitations identified for this study?

The main limitations include the specific time period (2001-2008) which does not allow for a pre-Euro analysis, the focus solely on Germany, and the difficulty in investigating determinants of interest rate exposure due to a lack of publicly available hedging activity data from German firms.

What recommendations does the author provide for future research?

Future research is recommended to expand the sample period to include pre-Euro data, conduct benchmark analyses for other developed European markets, investigate the reasons why certain industries are strongly affected by interest rate risks, and consider additional explanatory variables like unanticipated inflation or consumer price index for greater insight into equity returns.