Stock Prices And Exchange Rates

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Question: Summarize the article: The Relationship Between Stock Prices And Exchange Rates Evidence From Turkey.

a. Introduction

Answer: Stock price movement remains a hotly debated topic among the research elite and in recent years many variables are seen to have significant influence over the stock prices including that of EPS, DPS, market conditions, earnings growth, management skills, GDP and Exchange rates etc. But very seldom any research has been undertaken to know how effective the influence of the exchange rates are on the stock prices and how the movement of rates in a specific market affects the stock prices. This current research has been earmarked to undertake the effect of exchange rates on the stock prices in the Turkey Markets(Mishra, 2009).

b. Theoretical background (literature review).

Answer: Exchangesrates are determined by demand-supply for the respective currencies but the interest rates and rates of inflation have continued to influence the rates. Therefore it is believed that engage rates can be used effectively to predict the stockmarketbehaviorin particular markets. For example, if the USD is weak then the US goods are chaperon foreign markets and which makes foreign goods more expensive in the USmarket. As the USD is cheap, the economy can be able to expand faster as interest rates would be lower and more business would be able to borrow huge amounts at cheaper rates and higher values. The capital stock would grow and more productive capacity can be built leading to higher experts and higher earnings and higher dividends being paid. All this can lead to an increase in stock prices in particular Market like Turkey. In the short term, the cheaper currency would be expected to lead to a higher rise in the prices across the market and the same is meant to benefit the management ofthe manufacturing and service related companies. Studies undertaken by earlier researchers concluded by asserting that that stock prices and favorable exchange rates determination were definitely related in a very positive correlation in the US economy (Ibrahim & H Aziz, 2003).

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c. Research Methodology.

Answer: The data is collected for the whole economy and the author have sued the Augmented Dickey-Fuller (ADF) and the Phillips- Peron (PP) tests for determining if the stock prices and exchange rates are correlated or not. The data has been gathered from the electronic data delivery system which was being maintained by the Central Bank of Turkey. The data were collected for the period between 23 February 2001 and to 11th Jan 2008. These dates were selected because of Turkey adopting a flexible exchange rates system in 2001.

d. Empirical analysis.

Answer: The empirical study undertaken using the ADF and PP tests were resulted including that there exists a bi-directional relationship which is causal among the variables analyzed. There is a negative casual relation between the exchange rate and the services and financial sectors. However, there is a definitive positive casual relationship between the exchange rates and the technology indices in Turkey. On the whole, there also exists an overall negative relationship between overall national stock market indices and the exchange rates. So while a portion of the overall market demonstrated a positive relation, part of the market is negatively influenced during the period of analysis.(Demirhan, 2009)

e. Conclusions and recommendations.

Answer: In some cases of earlier research it was found that there exists a relation between bot the variables, others found no such relations at all. Later on scholars found the direction and value to be quite different from one market to another. The basic premise of the theory is that if the stock market indices are growing up then the market participants believe that the economy's growing too and the same results in more interest in investing in such a market by foreign investors which increases supply of foreign currency like USD and also increases the demand for domestic currency in Turkey. Negative market growth can bring the opposite results. Form the tests which were conducted above signaled that despite the market growth while the part of the market was influenced positively, part of the Turkey market was negative reacting. Hence a generalization is hard to make and can be said that results were segmented specific and does not work in unison(Bodie, 2012).

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