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Dynamic Relationship Between Exchange Rates and Stock Prices

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Dynamic Relationship Between Exchange Rates and Stock Prices
DYNAMIC RELATIONSHIP BETWEEN EXCHANGE RATES AND STOCK PRICES:
AN EMPIRICAL STUDY IN THE
INDIAN CONTEXT.

Meer Pratap Thakker
II MFM (Masters of Financial Management)
School of Business Management, Accounting & Finance
Sri Sathya Sai Institute of Higher Learning.
Prasanthi Nilayam
Anantapur – 515134 e-mail—meerthakker@rediffmail.com Ph no: 09880249018 / 02231084035

Shri Vijay R Chary
Faculty, School of Business Management, Accounting & Finance
Sri Sathya Sai Institute of Higher Learning.
Prasanthi Nilayam
Anantapur – 515134 e-mail—vijayc@yahoo.com Ph no: 08555288475

Abstract Theory says that exchange rates should have a direct impact on the companies with heavy import or export activities and thus affecting their profitability and hence the stock prices. To check for the relevance of this effect, empirical tests have been conducted all over the world including in India. Most of the studies used market index as dependent variable and it was thus hypothesized that non-existence of relation between stock prices and the exchange rates, at least for India was because of improper sample selection. Keeping this in view two special indices are constructed that involves companies having high level of import and export activities. A sample of three import and three export companies are taken to see the effect of exchange rate movements on their stock prices. The analysis uses monthly data for the post liberalization era from April 1993 to March 2003 & weekly data from June 1998 to November 2003. The weekly data is further subdivided into two periods of depreciating and appreciating rupee against the dollar. The exchange rates used are Rs/$ nominal rate and also Real effective exchange rate. Various statistical tests such as regression equation, co-integration, Granger causality, forecasting etc., are used to do the analysis. The study supports the explanation that stock prices do not reflect changes in the exchange rate inspite of using



References: ← Abhay Pethe, Ajit Karnik, (2000), “Do Indian stock markets matter? Stock market indices and macro economic variables”, Economic and political weekly, Vol 35, pp 1-10 ← Ajayi, R ← Issam S.A. Abdalla, Victor Murinde, (1997), “Exchange rate and stock price interactions in emerging financial markets: Evidence on India, Pakistan and Phillippines”, Applied Financial Economics, Vol 7, pp 25-35 ← Luc A Soenen, Elizabeth S ← Mohsen Bahmani Oskooee, Ahmad Sohrabian, (1992), “Stock prices and the effective exchange rate of Dollar”, Applied economics, Vol 24, pp 459-464 ← Richard A ← Solnik B., (1987), “Using Financial prices to test exchange rate models”, Journal of Finance, Vol 42, pp 141-149 ← Yamini Karmarkar, G ← Basabi Bhattacharya, Jaydeep Mukherjee, Department of Economics, Jadavpur university, Kolkata, (2002), “Causal relationship between stock market and exchange rate, forex reserves and value of trade balance: A case study for India” ← Golaka C ← Naeem Muhammad, Abdul Rasheed, Department of Economics and Finance, Institute of Business administration, Karachi University, (2002) “Stock prices and exchange rates: Are they related? Evidence from South Asian countries” Software packages used

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