The relationship between exchange rates and stock prices

The relationship between exchange rates and stock prices is examined in three independent but inter-connected studies. The original contribution of first study is the finding that interest rates have a significant non-liner explanatory power in the relationship between exchange rates and stock prices. The main contribution of the second study is the finding that there are asymmetric volatility spillover effects between exchange rates and stock prices in both developed and emerging countries, particularly during the financial crisis. The third study makes original contribution to knowledge by finding that there is no major deference between Eurozone and non-Eurozone, and between financial and non-financial firms in terms of exchange rate exposures after controlling for market effects.

In study 1, the evidence from the M-TECM tests indicate that there is a uni-directional causality from stock prices to exchange rates in the Eurozone, a unidirectional causality in the opposite direction in Brazil, and a bi-directional causality between the variables in Russia. In study 2, the results of the EGARCH tests indicate that there is a uni-directional volatility spillover effect running from stock prices to exchange rates in developed countries and a volatility spillover in the opposite direction in emerging countries. In study 3, the results of the regression tests show that 18% of Eurozone firms and 16% of non-Eurozone firms, and 20% of financial firms and 16% of non-financial firms have significant exchange rate exposures. However, the exposure increases during the financial crisis.

Overall, the thesis finds evidences supportive of long-run equilibrium and short-run causal relationships between exchange rates and stock prices in macro level. In micro level, however, the relationship between exchange rate movements and the market value of firms is relatively weak.