Relationship Between Exchange Rate and Stock Market

Topics: Stock market, Exchange rate, Foreign exchange market Pages: 29 (7391 words) Published: July 1, 2013
Pir Mehr Ali Shah

University of Arid Agriculture Rawalpindi

The Relationship between Stock Prices and Exchange Rate,

Evidence from Pakistan

Usman Azhar08-arid-1606

Abid Hussain08-arid-1608

Faisal Shahzad 08-arid-1620

Usman Fazal 08-arid-1634

MBA Finance

University Institute of Management Sciences

Dedication

We would like to dedicate this accomplishment
to our beloved and caring parents,
and to our teachers with the support of whom we
are standing at this step of our life stairs.
Acknowledgement

All gratitude and thanks to almighty “ALLAH” the Gracious, the most Merciful and Beneficent Who gave us courage to undertake and complete this task. We are very much obliged to our ever caring and loving parents whose prayers have enabled us to reach this stage. We are grateful to almighty ALLAH who made us able to complete the work presented in this report. It is due to HIS Unending Mercy that this work moved towards success. We are highly indebted to our course co-coordinator and research supervisor Miss. Sidra Shehzadi whose patience and faith in our abilities always boosted our confidence. We are very great full to our teacher Mr. Ammar Asghar for providing us guideline for the completion of this report. We would like to present a token of thanks to our visiting faculty members Mr. Arshad Hassan and Mr. Zaheer Abbas, who were cooperative to us in the completion of this report and provide us their complete guidance.

Our special thanks to Mr. Kashif Saeed (Assistant Professor Economics Dept) and Sir. Abdul Shakoor (Chairman Statistic Dept.) who gave us a horde of useful information and treated us extraordinarily at each step of our learning during research work.

Abstract

The paper examines the long and short run relationship between stock prices and exchange rate in the context of Pakistan. We used monthly data of KSE-100 index and PKR/US$ and applied Cointigration, correlation and standard granger causality tests to check the long and short run association between stock prices and exchange rate. Our findings show that relationship between KSE-100 index and exchange rate is insignificant. There is no evidence of any short-run or long run association between given variables. The results show that for Pakistan stock prices and exchange rate have very weak but negative correlation. But at the same time both are not cointigrated and relationship is insignificant. Bidirectional long run granger causality test indicates that both variables are unrelated, so by analyzing one market, prediction of the behavior of second one is difficult or spurious.

TABLE OF CONTENT

1.Introduction5

2.Problem Statement8

3.Objectives8

4.Literature Review9

5.Methodology and Data Sources16

6.Conclusion27

7.References28

1. Introduction
THE LIBERALIZATION OF FOREIGN CAPITAL CONTROLS AND TAKING UP OF FLOATING EXCHANGE RATE SYSTEM IN THE WORLD HAVE WIDENED THE SCOPE OF STUDYING THE RELATIONSHIP BETWEEN STOCK PRICES AND EXCHANGE RATE. RELAXATION IN POLICIES WITH RESPECT TO FOREIGN CAPITAL CONTROLS HAS ATTRACTED THE INTERNATIONAL INVESTMENT AND IMPLEMENTATION OF FLOATING EXCHANGE RATE SYSTEM HAS INCREASED THE FLUCTUATION OF FOREIGN EXCHANGE MARKET. THUS IDENTIFYING THE CONNECTION BETWEEN STOCK PRICES AND EXCHANGE RATES HAS BECOME CRITICAL FOR THE ACADEMICIANS, PRACTITIONERS AND POLICY MAKERS.

According to Kurihara, professor of economics in Aichi University Japan, daily stock prices are influenced by many forces, such as company performance, dividends policy, stock prices of neighbor countries, gross domestic product, exchange rates, interest rates, current account, money supply, employment, ease of access to new information etc....

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