Dynamic Relationship between Stock Market & Exchange Rate
The Asian crisis of 1997-98 has made a strong pitch for dynamic linkage between stock prices and exchange rates. During the crisis period, the suffered countries collapsed due to substantial depreciation of exchange rates (in terms of US$) as well as dramatic fall in the stock prices. This has become important again from the view point of large cross border movement of funds due to portfolio investment and not due to actual trade flows. This fact drawn the attention of many researchers and academicians to find out the dynamic relationship between stock market movement and Exchange Rate.
I used NSE Nifty closings and Exchange Rate and the Sample time period was from jan,2001-jul,2006. I find out that both the variables are significantly positively correlated as high as +0.678. which shows that Exchange rates effects stock Markets.
The rational goes like this, when the domestic currency appreciates the domestic export oriented companies suffer because they get lesser revenue since the dollar depreciates, and when the domestic currency depreciates or the foreign currency appreciates the import oriented companies suffer because they have to make comparatively more payment and it effects their revenue and earnings, which is reflected in their stock prices.
So, we can conclude that exchange rate is not one and only but one of the factor to effect the stock market movement.
I used NSE Nifty closings and Exchange Rate and the Sample time period was from jan,2001-jul,2006. I find out that both the variables are significantly positively correlated as high as +0.678. which shows that Exchange rates effects stock Markets.
The rational goes like this, when the domestic currency appreciates the domestic export oriented companies suffer because they get lesser revenue since the dollar depreciates, and when the domestic currency depreciates or the foreign currency appreciates the import oriented companies suffer because they have to make comparatively more payment and it effects their revenue and earnings, which is reflected in their stock prices.
So, we can conclude that exchange rate is not one and only but one of the factor to effect the stock market movement.
1 comment:
The relationship does exist but it is quite obvious/deducible in nature. Morever it will effect the stock prices of those companies which have high global exposure. Currently Indian rupee is appreciating yet the stock market is going up. Seems sensex is well diversified with export& import oriented companies.
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