The impact of real exchange rates on real stock prices.
| Autor | Wong, Hock Tsen |
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Introduction
The stock price can be influenced by many economic factors, such as the real exchange rate can affect the export and import of a company and therefore its profit (Mar Miralles-Quiros et al, 2017; Eldomiaty et al, 2020). When the profit of a company falls, its stock price likely shall be lower and vice versa. The real exchange rate highly fluctuates as it can be affected by many factors. The real exchange rate is crucial for firms in an open economy. Globalisation makes firms unlikely to avoid external shocks. The impact of appreciation or depreciation of the real exchange rate on firms may not be the same on the real stock price. Ding (2021) reports that the stock prices of the USA are closely linked with the appreciation (depreciation) of the US dollar, and the US stock prices are sensitive to the change of exchange rate. A rise in the real exchange rate could lead to a rise or a decrease in the real stock price. Depreciation of real exchange rates can boost the real stock prices. Depreciation of the real exchange rates suggests cheaper export prices. Firms can export more and earn more profits, which will increase the real stock price. On the other hand, depreciation of the real exchange rate increases the costs of imported inputs for firms, which could increase selling prices and hence can reduce sales and profits. Thus, the real stock price of the firms would decrease (BahmaniOskooee and Saha, 2016). However, the empirical evidence does not always demonstrate the significant relationship between real exchange rate and real stock price. There is no significant relationship between real exchange rate and real stock price; this can be due to incomplete pass through from real exchange rate to export prices as firms adjust their profits from real exchange rate change (Kilic, 2016). The impact of the real exchange rate on real stock price may be symmetric, that is, depreciation of the real exchange rate increases the real stock price whereas appreciation of the real exchange rate decreases the real stock price. However, the impact of real exchange rate on real stock price may be asymmetric, that is, appreciation of the real exchange rate can increase the costs of imported inputs and thus can lead to lower profit and real stock price whereas appreciation of the real exchange rate can also reduce the costs of imported inputs and thus can lead to more profit and higher real stock price (Bahmani-Oskooee and Saha, 2015). The Asian financial crisis (1997-1988) demonstrates that depreciation of the Thai baht causes depreciation of other currencies and leads to the downfall of stock markets in Asia (Dimitrova, 2005). The global financial crisis of 2008 also caused the downfall of stock markets in the world. The relationships between stock prices and exchange rates can affect economic growth and the success of government policies (Lin, 2012, p. 161; Sui and Sun, 2016).
This study examines the influence of real exchange rates and asymmetric real exchange rates on real stock prices in Malaysia, the Philippines, Singapore, Korea, Japan, the United Kingdom (UK), Germany, Hong Kong and Indonesia using the linear autoregressive distributed lag (ARDL) and nonlinear autoregressive distributed lag (NARDL) approaches (Pesaran et al, 2001; Shin et al, 2014). Therefore, the impact of real exchange rate on the real stock price is evaluated through the ARDL approach whereas the asymmetric real exchange rate on the real stock price is evaluated through NARDL. These economies adopt a different exchange rate regime (International Monetary Fund, 2021). Therefore, the relationship between real exchange rate and real stock price is inferred from a group of different exchange rate regimes. The impact of a change of real exchange rate on firms in an economy with a different exchange rate regime may not be the same. There are not many studies that investigated the asymmetric real exchange rate on the real stock price. Wong (2019) examines the link between real exchange rate returns and real stock price returns of some individual stocks in Malaysia over the sample period from January 2000 to June 2015. There is a link between the exchange rate market and the stock market, but not every real stock price return is significantly inked with real exchange rate return. The results of this study shall be practical for investors and relevant authorities in the economy.
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Literature review
The real stock price can be affected by many economic factors. Peiro (2016) examines economic factors, namely the growth rates of industrial productions and long-term interest rates on stock returns in France, Germany, and the UK, respectively, over the period from 1969 to 2013. The results demonstrate that the growth rate of industrial production affects stock return positively while the growth rate of long-term interest rate influences stock return negatively in all the three countries examined. Similar conclusions are obtained by using different proxies of the growth rates of industrial productions and long-term interest rates and also sub-periods. Stock prices move simultaneously with interest rates and anticipate movements in industrial productions one year in advance. Future changes in industrial productions and current changes in long-term interest rates account for about one-half of stock returns. Nonetheless, this study does not investigate the influence of exchange rates on stock return.
Exchange rate and stock price are said to be closely linked (Wong, 2018). Multinational firms are involved in international transactions, and their profits are strongly influenced by real exchange rates. Moreover, the change of real exchange rates could have an asymmetric impact on the real stock price. Sui and Sun (2016) investigate the dynamic relationships among local stock returns, exchange rates, interest differentials and the US S&P 500 returns in Brazil, Russia, India, China and South Africa (BRICS). The results exhibit that the spillover effects are from exchange rates to stock returns in the short run and not vice versa. The spillover effects from the stock return to exchange rate are only found to be significant in Brazil and Russia. The US S&P 500 shocks influence stock markets in Brazil, China and South Africa. This indicates that the US stock price has the information to predict stock prices in BRICS. The spillover effects from exchange to stock returns are found to be increased in the financial crisis of 2008-2009. A well-managed exchange rate regime can stabilise the stock market in a financial crisis.
There are several studies that examined Granger causality between stock prices and exchange rates (Liang et al., 2013). Caporale et al. (2014) explore the linkages between stock market prices and exchange rates in six advanced economies, namely the USA, the UK, Canada, Japan, the euro area and Switzerland in the banking crisis over the period from 2007 to 2010. Bivariate unrestricted extended dynamic conditional correlation (UEDCC)generalised autoregressive conditional heteroskedasticity (GARCH) models are estimated and found evidence of unidirectional Granger causality from stock returns to exchange rate changes in the USA and the UK, unidirectional Granger causality from exchange rate change to stock return in Canada and bidirectional Granger causality in the euro area and Switzerland. Moreover, Granger causality in variance from the stock return to exchange rate change is found in the USA, and Granger causality in variances from exchange rate changes to stock returns is found in the euro area and Japan. Bidirectional Granger causality in variances between exchange rate changes to stock returns is found in Switzerland and Canada. The results of the time-varying correlations display that dependence between stock return to exchange rate change is found to be increased in the financial crisis. This limits opportunities for investors to diversify their assets.
Ho and Huang (2015) inspect the causality invariance and the relationships between stock prices and exchange rates of Brazil, Russia, India and China (BRIC) using the Lagrange multiplier test. The weekly closing prices data from February 2002 to December 2013 are used. The sample period is divided into two sub-periods using the Chow breakpoint test and Quandt-Andrews unknown breakpoint test. For the full sample period, Granger causality from exchange rate to stock price is found in Brazil. Bidirectional Granger causality between stock price and the exchange rate is found in Russia. Granger causality from exchange rate to stock price is found in India. There is no Granger causality between stock price and exchange rate in China. Granger causality from exchange rate to stock price is found in the first subsample period, and no Granger causality between stock price and exchange rate in the second sub-period is found in Brazil. Granger causality from stock price to exchange rate in both the first sub-period and the second sub-period is found in Russia. Granger causality from exchange rate to stock price in both the first and the second sub-period is found in India. There is no Granger causality between stock price and exchange rate in the first sub-period in China and Granger causality from exchange rate to stock price in the second sub-period is found in China. This study claims that volatility can be transmitted between stock price and exchange rate although changes of stock price and exchange rate are either statistically uncorrelated or have no Granger causality in means. Tsagkanos and Siriopoulos (2013) probe the relationship between stock prices and exchange rates in European Union (EU) and the USA in the financial crisis of 2008-2012. The results are compared with a previous period where stock markets were operating under normal conditions. This study employs the structural nonparametric cointegrating regression. The results show Granger causality from stock prices to...
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