Essay: The relationship between exchange rate and share prices

Some studies have been undertaken to examine the relationship between exchange rate and share prices. Dimitrova (2005) predicts the connection between share prices and exchange rates. He has utilized a multivariate model, emphasizing the stock market of the US and the UK for that period of 1990 to 2004. This study created a hypothesis that it has an association on the list of foreign exchange rate and stock markets. He finds that there exists a positive relationship when share prices are the main element variable and negative when exchange rates will be the key variable.

In accordance with De Jong & Ligterink, and Macrae (2006), they discover that half of the firms are significantly confronted with exchange rate risk. They predict the relationship between exchange rate and stock returns. They find all firms with critical exchange rate indicate reap the benefits of depreciation with the Dutch guilder in accordance with a trade-weighted currency index. This result points out that firms in open economies, including the Netherlands, exhibit significant exchange rate exposure.

Yu (1997) found a powerful long-run stable relationship for Hong Kong, Tokyo, and Singapore. Ajayi, Friedman & Mehdian (1998) provided evidence that stock market causes currency markets for that developed countries but no consistent causal relations in the emerging markets. Jefferis and Okeahalam (2000) discovered that real share prices are positively related towards real exchange rate in South Africa. Nieh & Lee (2001) found out that only short-term dynamic relationship with G-7 countries. Fang (2002) contended that exchange rates also influence share prices and demonstrated that currency depreciation adversely affected stock returns and increased market volatility over then duration of Asian crises. Bhattacharya and Mukherjee (2003) discovered no vital causal linkage in the Indian market. Muhammad and Rasheed (2003) handled four South Asian countries and also found no relationship for Pakistan and Indian market either in other words in short-run or even in long-run. Stavarek (2004) investigates the causal relationship in four EU countries as well as the United States. The result indicate stronger causality in countries with developed capital and foreign exchange markets compared to the modern comer.

Based on Hussain et al. (2009), they think about the quarterly data of numerous economic variables which includes foreign exchange rate, foreign exchange reserves, industry production index, wholesale price index, and others, these variables are acquire from 1986 to 2008 period. The effects shown that whenever the incentives in 1991 the manipulation of foreign exchange rate and reserve effects positively to stock market whiles extra variables like IIP and GFCF has never effects to share prices. The outcomes also discloses that domestic variables like increase production and capital structure not effects significantly while outer factors such as exchange rate and reserve have some significant effects on share prices

Furthermore, positive and vital relationship relating to movement of the USD-MYR as well as the movement on the share prices also offers shown in Thye (2000) investigation involving the movement on the USD-MYR and the movement of the stock prices. He tries to ascertain in the event the movement on the foreign exchange rate had any major effect on the share prices of Malaysian firms. He applies correlation and regression test with the period covered from 1 January 1996 to 31 December 1998. Rangel (2002) results would not indicate that foreign exchange risk is usually a significant element determining firm value in Malaysia. To discover these result monthly closing prices from the stocks within the KLSE from January 1990 to December 1996 was utilized.

However, a survey performed by Mullera and verschoor (2007) investigate regardless of if the equity value of individual Asian internationally active firms are influenced by exchange rate changes, whether the Asian foreign exchange risk disclosure patterns are industrial, and if the firm’s exchange exposure is much more evident across increasing time horizons. By using a sample of 3634 Asian internationally active firms, they discover that for the period from January 1993 to December 2003, about 25% of such firms experienced economically critical exposure effects towards the US dollar, and 22.5% towards the Japanese yen.

In addition, they learn the disclosure of individual firms which are various Asian industries, in contrast to average industry exposure. What is more, individual firms in these industry groups show high positive together with adverse exposure, suggesting that exposure seriously is not necessarily economically significant within the aggregate. Asian firms with non-essential exposure effects are intensive only in a variety of industries. Furthermore, they investigate the character of exchange exposure across increasing return measurement intervals. The findings claim that the extent that Asian firms are faced with changing in foreign exchange. Short-term disclosure is apparently relatively well hedged, where considerable proof of long-term exposure is discovered. They find, indeed, more than 70 percent of Asian firms are remarkably suffering from US dollar exchange rate fluctuations in the long-term. They realize that Asian internationally active firms which have a low dividend payout ratio (strong short-term liquidity positions) have less incentive to hedge and thus have larger exchange rate exposures.

Correspondingly, more profitable firms are systematically more put to exchange rate fluctuations than less profitable firms. Despite the US finding, they know that highly leveraged firms or firms having a lower alert ratio generally higher exposure to exchange rate risk. Firms with weak liquidity positions generally have smaller exposures.

Source: Essay UK - http://ntechno.pro/essays/finance/essay-the-relationship-between-exchange-rate-and-share-prices/


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