Stock returns, exchange rate movements and central bank interventions

We used Swiss data to examine the link between stock returns and exchange rate movements. Our evidence indicates that the link between stock returns and exchange rate movements is nonlinear and strengthens in periods of central bank interventions in the foreign exchange market. Consistent with market efficiency, it would have been difficult for an investor to use information on potential nonlinearities to improve the performance of trading rules. This suggests that the link between stock returns and exchange rate movements reflects fundamental economic effects like, for example, transaction costs in international goods market arbitrage.