Heterogeneous investors' reaction to exchange rate movements: New evidence from a unique emerging market

Previous studies find mixed results on the relation between exchange rate movements and stock returns. We revisit the issue by exploring the effect of market efficiency and heterogeneous investors' reaction to exchange rate changes using the unique event of Chinese currency appreciation. Our results show that different investor groups react differently to exchange rate appreciation. In addition, we find that investors with limited investment opportunities react more positively to exchange rate appreciation. Our results suggest that the issues of market efficiency and the differences among investors are important factors to consider when one analyzes the relation between exchange rate movements and stock returns.