Zohrabyan, Tatevik (2005-12). The effect of the currency movements on stock markets. Master's Thesis.
This paper uncovers the relationship between stock markets and exchange rates
in seven countries by employing stable aggregate currency (SAC) for the period of 1973-
2004. Ordinary Least Squares (OLS) regression, time series methods, and directed
acyclic graphs are applied to the daily data on stock market indices and exchange rates.
The findings based on regression analysis show that exchange rate exposure of stock
markets is statistically significant when stock indexes in SAC are used. Using an
innovation accounting technique, we confirm that stock markets and exchange rates are
correlated. Moreover, in most cases stock markets are more exogenous than foreign
currency markets, which explains the relatively high percentage of uncertainty in the
foreign currency market. Overall, SAC-based models give relatively more accurate and
robust results than those which employ stock indices in local currencies, because it is
more accurate to convert both variables into the same denominator.