# Dissertation, Finance and Accounting Impact of foreign exchange rate on stock returns

Chapter 5: findings and analysis
5.1 Introduction
The ADF test was applied in this study to test the null hypotheses of unit root in each of the series. Basically, if the ADF statistic exceeds the critical value in each of the tests, then the null hypothesis of the unit root cannot be accepted. On the other hand, if the test statistic does not exceed the critical value, then the null hypothesis is accepted and the series is then said to be non-stationary (Dickey and Fuller, 1981). Table 1 reports the results of Augmented Dickey Fuller test of unit root for the stock indices and exchange rates of both the UK and Pakistan. The test has further been applied at different levels as well as in the first difference form. The findings will be reported in terms of each country starting with the UK first then Pakistan. Both the ADF and regression results will be presented for the country indices and then for each of the companies. This chapter is divided into several parts with the main parts comprising study findings for the UK (both ADF test and regression), study findings from Pakistan (ADF and regression), and finally the analysis section where these findings are discussed and analyzed.
5.2 Findings (UK)
Augmented Dickey Fuller (ADF) Test
Table 1 below presents ADF results for UK companies and GBP/USD rate. As is evident in the table, the results include the FTSE 100 index and ten major companies operating in the UK. Table 2 provides the findings of the ADF test for the national exchange rate (EX) of the GBP against the GBP.
Table 1: Augmented Dickey Fuller test (UK companies and FTSE 100 Index)

Augmented Dickey fuller (ADF) test (UK companies and FTSE 100 Index)

Index + companies
S= Index value/ stock price
Critical values of  1%, 5%, 10% at Level
ΔS= 1st difference
Critical values at 1%, 5%, 10% for ΔS

FTSE 100

-2.250374

-3.486064
-2.885863
-2.579818
-10.25769
-2.584707
-1.943563
-1.614927

Antofagasta
-3.066955
-4.036983
-3.448021
-3.149135

-12.97182
-2.584707
-1.943563
-1.614927

Babdock
-1.747700
-4.036983
-3.448021
-3.149135

-10.71888
-3.486551
-2.886074
-2.579931

HSBC Holdings
-2.867695
-3.486064
-2.885863
-2.579818

-10.42942
-2.584707
-1.943563
-1.614927

Imperial tobacco
-2.160689

-4.036983
-3.448021
-3.149135
-11.17921
-2.584707
-1.943563
-1.614927

Johnson matthey
-2.543982
-4.036983
-3.448021
-3.149135
-10.41562
-2.584707
-1.943563
-1.614927

Meggit
0.828451
-2.584539
-1.943540
-1.614941
-11.56089
-2.584707
-1.943563
-1.614927

Morrison
-2.901854

-4.036983
-3.448021
-3.149135
-11.50647

-2.584707
-1.943563
-1.614927

Pearson plc
-1.841245
-4.036983
-3.448021
-3.149135
-12.55195
-3.486551
-2.886074
-2.579931

Standard chartered bank
-1.868623

-3.486064
-2.885863
-2.579818
-10.62130
-2.584707
-1.943563
-1.614927

Weir group
-1.782673
-4.036983
-3.448021
-3.149135
-9.851895
-2.584707
-1.943563
-1.614927

Table 2: Augmented Dickey fuller (ADF) test (GBP/USD)

Augmented Dickey fuller (ADF) test (GBP/USD)

Currency
X= Exchange rate
Critical values of  1%, 5%, 10% at Level
ΔX= 1st difference
Critical values at 1%, 5%, 10% for ΔX

GBP/USD
-2.046301
-4.036983
-3.448021
-3.149135
-9.755815
-2.584707
-1.943563
-1.614927

According to the findings of the study, the ADF test results for the FTSE 100 index show that FTSE statistic value does not exceed the critical values at the 1%, 5%, and 10% critical levels. Therefore, the null hypothesis of the unit root for the index is accepted and thus it contains a unit root all the levels. This stock index is, therefore, non-stationary. However, at the first difference, the stock index becomes non-stationary as results indicate that the index statistic exceeds the critical values at 1%, 5% and 10% levels.
For Antofagasta, it is evident from the results that the statistic value at level does not exceed the critical values at 1%, 5%, and 10%. Therefore, the null hypothesis of the unit root for the index cannot be rejected and thus it contains a unit root. However, the same is not true for tests at the first difference because the statistic value to the company exceeds the critical values at all the three levels. In this case, the Antofagasta stock price is deemed to be stationary. In the case of Babdock, the statistic value of their stock at level is lower than the critical values at the 1%, 5%, and 10% levels meaning that the null hypothesis of the unit root for the company is accepted. The index value for the company is, therefore, non-stationery. It is, however, observed that at the first difference, the statistic value of the index for the company is lower than the critical values at 1%, 5%, and 10%. This also indicates that the null hypothesis is rejected and that the index does not contain a root. Consequently, the stock for the company is deemed to be stationary. The same observation is true for HSBC, Imperial Tobacco, John Matthey, Meggit, Morrison, Pearson, Standard Chartered, and Weir Group
It can be observed that for all the companies in the UK, at the first difference (ΔS), the statistic value of the index for the company is lower than the critical values at 1%, 5%, and 10%. This, therefore, indicates that the null hypotheses for all the cases should be rejected and that their indexes do not contain a root at the first difference. Consequently, the stocks for the companies are deemed to be stationary.
Regression Analysis
Table 3 below shows the regression analysis results of the FTSE 100 index and the 10 companies in the UK included in the study. The regression analysis was carried out with Foreign Exchange Rate (EX) as the independent variable with the dependent variable being Stock return.
Table 3: Summary of regression analysis results (UK)

Regression Statistics
Antof.

Babdock
HSBC Holdings
Imperial Tobacco
John
Matthey
Meggit
Morrisson
Pearson
Plc
Std.
Chart
Weir
Grp
FTSE
100 Index

Multiple R
0.03854
0.06168
0.10825
0.01143
0.01407
0.05136
0.14615
0.11793
0.02821
0.05550
0.02384

R Square
0.00148
0.00380
0.01172
0.00013
0.00019
0.00263
0.02136
0.01390
0.00079
0.00308
0.00056

-0.00705
-0.00471
0.00327
-0.00842
-0.00835
-0.00589
0.01299
0.00548
-0.00774
-0.00544
-0.00797

Standard Error
88.0448
29.268
32.8717
82.8903
111.726
18.6362
12.3243
35.0234
90.0953
91.4569
64.8731

Observations
119
119
119
119
119
119
119
119
119
119
119

Significance (95% Conf.)
0.6773
0.5052
0.2412
0.9017
0.8793
0.5790
0.1127
0.2015
0.7607
0.5488
0.7967

The regression analysis results of the FTSE index in the table reveal that the regression model used in this study explains 0.2% of effects of foreign exchange rate (Independent Variable) on Stock Return (Dependent Variable) in the UK. This means that the remaining 99.2% of effects on the index can be explained by other variables (In this case extraneous variables). The level of significance is 0.6773 at the 95% significant level, which is greater than 0.05 indicating that the results are, therefore, not significant.
In the case of Antofagasta, R squared is 0.00148; this means that the model can explain 0.15% of the effects of foreign exchange on Stock return. Extraneous variables, therefore, affect more than 98% of the observable trends in stock return. The result is not significant at the 95% level of confidence (Significance=0.6773). Babdock registered an R squared value of 0.0038, which means that the model accounts for about 0.4% of the effects of foreign exchange on stock return for the company. The results are not significant at the 95% confidence level (Significance=0.5052)
For HSBC, the model accounts for about 1.2% of the total variability meaning that over 98.8% of the changes in stock return are not affected by foreign exchange, but are attributed to extraneous factors. The findings are non-significant at 95% confidence level (s= 0.2412). On the other hand, for the case of Imperial Tobacco, the model accounts for about 0.13% of variability in foreign exchange rate affecting returns in stock for the company. The rest is affected by other variables outside the model. The results are not significant at the 95% confidence level (Significance=0.9017).
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