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Are you sure you want to Yes No. Aashay Gidra at Don Bosco School - Siliguri. Embeds 0 No embeds. No notes for slide. ECONOMIC TRENDS - RAPPORT BETWEEN STOCK INDICES AND CURRENCY VALUES Abstract The paper examines the relationship between movements of stock indices and currency exchange rates for the period , and it is found that there is a significant positive correlation between the two, for the countries India, China, Malaysia, Brazil and Singapore; insignificant correlation in case of Swiss, Japan, UK and Germany, whose currencies are recognized for global trading as popular currencies; negative correlation in case of Pakistan, whose currency was quite unstable during the study period.

Introduction Globalization era has facilitated international diversification and abolishment of capital flow barriers. Rapid expansion of international trade has curved the corporate firms to face increased exposure of exchange rate risks. The exchange rate changes can have an effect on the economic value of the firms, which ultimately will have an influence on their stock values.

Alternatively, change in stock prices influences foreign investors to take investment decisions, which eventually affects the demand for the domestic currency.

Stock market and Forex market have become more and more interdependent during the recent years with the emergence of flexible exchange rate systems and gradual fading of foreign 1 2. This paper attempts to examine the relationship between movements of stock indices and exchange rates of 10 countries, out of which 5 are developed and 5 are developing, over the period The study also highlights the relationship of stock market performance and currency value of India with those of other countries.

Statement of the Problem 2.

The bullish and bearish trends in movements of share prices are mostly dependent on the market forces. Hence, the movements of stock market indices indicate the progress of economy of a country. Thus, the value of a currency is also regarded as an indicator of the economic situation of its country.

The relationship can be used by multinational companies to predict the direction of exchange rate movements and manage their foreign exchange exposures. As currencies are also being used as portfolio assets, the study can also be helpful for the investors and fund managers to select a balanced portfolio. Review of Literature Oguzhan Aydemir and Erdal Demirhan investigated the causal relationship between stock prices and exchange rates and the results of their empirical study indicated that there was bidirectional causal relationship between exchange rate and all stock market indices from Turkey.

Baig and Goldfajn , tested for the evidence of contagion between the financial markets of Thailand, Malaysia, Indonesia, Korea and the Philippines.

They found that the cross-country correlations among the currencies and sovereign spreads are found to increase significantly during the crisis period, whereas the equity market correlations offered mixed evidence. Their study also concluded that the Singapore stock market was significantly and positively cointegrated with stock markets of Japan and United States.

Abdalla and Murinde investigated the interaction between exchange rates and stock prices in the emerging markets of India, Korea, Pakistan and The Philippines and their results showed unidirectional causality from exchange rates to stock prices in all the sample countries except the Philippines.

Morely and Pentecost investigated the nature of relationship between stock prices and spot exchange rates using time series modeling and found that the stock prices and the exchange rates did not exhibit common trends, but did exhibit common cycles.

Friberg and Nydahl examined the relationship between valuation of stock market and an effective exchange rate using monthly data on 11 industrial countries for a period They found that the more open the economy, the stronger was the positive relationship between return on the stock market and the exchange rate.

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Levine and Zervos examined whether there was a strong empirical association between stock market development and long-run economic growth and found a positive and robust association between the two. Caruso examined the impact of stock market fluctuations on money demand in Italy from a long-run prospective.

His empirical results suggested a positive association emerging from an index of stock market prices and real money balances. Stock market turnover and money growth were found to be positively correlated.

Cheung and Lilian found an empirical evidence of long-run co-movements between five national stock market indices and measures of aggregate real economic activity. They found that the real returns on these indices were typically related to changes in the macroeconomic variables.

Bracker, Docking and Koch investigated why different pairs of national equity markets displayed differing degrees of co-movement over time and found that the extent of stock market integration depended upon certain macroeconomic 4 5. To study the relationship between the performance of stock markets and currency exchange rates.

To study the relationship between the performance of Indian stock market as against that of other countries. To study the relationship between the performance of Indian currency as against that of other countries. There is no significant relationship between stock performance and currency performance in India 5. Methodology Research Design is Analytical in nature. The study is undertaken for a period of 9 years from January to December Convenient sampling method is used to select 10 countries, out of which 5 are developed countries and the other 5 are developing countries, to undertake the study.

Sample size is for each sample element, the sample frequency being monthly. The sample elements consist of the popular stock market indices of the selected 10 countries and their respective currency exchange rates with United States Dollar USD as base currency Refer Table 1.

Details of Sample elements The entire data set is secondary data collected from the following websites: Correlation technique is used for analysis a perfect correlation is represented by a correlation coefficient of 1; perfect negative correlation by -1 and zero represents no correlation and bar charts are used for pictorial representations of the relationships.

Analysis and Findings 6. Considering a period of nine years from to , Table 2 shows that the currency exchange rates and stock indices show a significant positive correlation for the countries India, S.

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China, Malaysia, Brazil and Singapore, insignificant positive correlation in case of Swiss, Japan, UK and Germany and negative correlation in case of Pakistan.

A study for the year , the year during which the world faced the meltdown due to Global Economic Crisis, it is observed that except China and Japan, whose currency and stock market performances show a high negative correlation, all other countries show a significant positive correlation. Stock Index versus Currency Exchange Rates - Correlation Country Correlation Coefficient Period from to Year India. Stock Index vs Currency Exchange Rates - Period from to Stock Index vs Currency Exchange Rates - Year -1 In case of Pakistan, although it is considered as a developing country, its economy faced a lot of challenges and its currency was quite unstable during the study period and hence the results may not have a meaningful inference.

As far as the results of the year are concerned, the reason for the significant observation negative correlation in case of Japan and China needs explanation. It can be associated to the fact that during , Crude oil prices declined drastically enabling US Dollar to appreciate against other currencies; while, Japanese Yen and Chinese Yuan appreciated against US Dollar.

However, the correlation is comparatively low in case of developed countries with Singapore as an exception. During the year , all the countries including the developed ones show a very high positive correlation.

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The result indicates that the recession has an equal influence on all the countries including the developed ones, as far as the stock market performances are concerned.

During the year , currencies of all countries considered for the study, except that of China and Japan, show a high positive correlation with Indian Rupee. Indian Rupee INR versus Currency Values of other countries - Correlation Country Correlation Coefficient Period from to Year Pakistan PKR. Indian Rupee INR versus Currency Values of other countries Hypothesis Testing Table 5 shows that the calculated value of significance 0.

There is a significant relationship between stock performance and currency performance in India. Conclusion The performance of stock markets and currency exchange rates in five out of ten countries considered for the study viz.

India, China, Malaysia, Brazil and Singapore, show a significant positive correlation. Correlation is insignificant in case of Swiss, Japan, United Kingdom and Germany, whose currencies are considered popular for global trading.

In case of Pakistan, whose currency was very unstable during the study period, the correlation is negative.

Performance of Indian Stock Market shows a significant positive correlation with the performances of stock markets of the other countries.

However, the correlation is comparatively low in case of developed countries, except Singapore. Indian Rupee has a significant positive correlation with the currency values of other countries, except Pakistan Rupee. It is observed that the correlation in case of currency exchange rates is not as strong as that of stock indices. A study for the year , the year during which the world faced the meltdown due to Global Economic Crisis, it is observed that except China and Japan, whose currency and stock markets show a high negative correlation, all other countries show a significant positive correlation.

Stock markets of all countries including the developed ones show a very high positive correlation with Indian stock market, indicating that the recession has an equal influence on all the countries. As far as the currency exchange rates are concerned, Indian Rupee is significantly correlated positively to the currencies of all countries, except that of China and Japan. The reason for these specific results in case of China and Japan can be associated to the fact that during , Crude oil prices declined drastically enabling US Dollar to appreciate against other currencies; although all currencies depreciated, Japanese Yen and Chinese Yuan appreciated against US Dollar.

Hence, we can conclude that stock market performance and currency exchange rates have a noteworthy relationship with each other. Oguzhan Aydemir and Erdal Demirhan , The Relationship between Stock Prices and Exchange Rates Evidence from Turkey, International Research Journal of Finance and Economics, Issue 23, p Foundations of Teaching with Technology.

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