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The impact of exchange rates on stock market returns: new evidence from seven free-floating currencies

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  • Alireza Zarei
  • Mohamed Ariff
  • M. Ishaq Bhatti

Abstract

This paper provides evidence of a significant exchange rate effect on stock index returns using data from seven selected countries practicing free-floating exchange rate regimes. This research uses parity and asset pricing theories, thus placing it within the monetary-cum-economics framework for international asset pricing. In this study, we apply a system of seemingly unrelated regression to control for unobserved heterogeneity and cross-sectional dependence. The findings constitute evidence of a statistically significant exchange rate impact on stock index returns across selected countries. These findings can be considered as falling under the arbitrage pricing approach of the international capital asset pricing model of Solnik who also used the parity-theoretical framework on exchange rate determination.

Suggested Citation

  • Alireza Zarei & Mohamed Ariff & M. Ishaq Bhatti, 2019. "The impact of exchange rates on stock market returns: new evidence from seven free-floating currencies," The European Journal of Finance, Taylor & Francis Journals, vol. 25(14), pages 1277-1288, September.
    • Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1277-1288
    DOI: 10.1080/1351847X.2019.1589550
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    Cited by:

    1. Faridah Najuna Misman & M. Ishaq Bhatti, 2020. "The Determinants of Credit Risk: An Evidence from ASEAN and GCC Islamic Banks," JRFM, MDPI, vol. 13(5), pages 1-22, May.
    2. Sri Utami Ady, 2021. "The Effect of World Oil Prices, Gold Prices, and Other Energy Prices on the Indonesian Mining Sector with Exchange Rate of Indonesian Rupiah as the Moderating Effect," International Journal of Energy Economics and Policy, Econjournals, vol. 11(5), pages 369-376.
    3. Azmat, Saad & Kabir Hassan, M. & Ali, Haiqa & Sohel Azad, A.S.M., 2021. "Religiosity, neglected risk and asset returns: Theory and evidence from Islamic finance industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    4. Salazar, Yadira & Merello, Paloma & Zorio-Grima, Ana, 2023. "IFRS 9, banking risk and COVID-19: Evidence from Europe," Finance Research Letters, Elsevier, vol. 56(C).
    5. Fernanda Gonçalves & Giuliano Ferreira & Alex Ferreira & Pedro Scatimburgo, 2022. "Currency returns and systematic risk," Manchester School, University of Manchester, vol. 90(6), pages 609-647, December.
    6. Ariff, Mohamed & Zarei, Alireza & Bhatti, M. Ishaq, 2021. "Monitoring exchange rate instability in 12 selected Islamic economies," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    7. Armida Amado & Looi Mun Choon, 2020. "Impact of Changes in Exchange Rate on Stock Market: An Empirical Evidence from Indonesia," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 7(1), pages 24-31.

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