How changes in exchange rates affect stock market performance in emerging countries
3 viewsAbstract
This study investigates the complex and often contradictory relationship between exchange rate fluctuations and stock market returns, with a specific focus on emerging economies. Utilizing a qualitative methodology based on an extensive review of existing academic literature and econometric studies, the research evaluates two primary theoretical frameworks: the flow- oriented model, which posits that currency movements drive firm competitiveness and stock prices, and the portfolio balance approach, which suggests that equity market trends dictate currency demand through capital flows. The findings indicate that the correlation between these two variables is dynamic and highly dependent on a country’s economic structure, trade openness, and investment horizon. While currency depreciation can enhance the profitability of export-oriented firms, it simultaneously poses significant risks for import-dependent sectors and can deter foreign direct investment. Furthermore, the study highlights the emergence of a bidirectional relationship in markets with high capital mobility. The paper concludes that for investors and policymakers in emerging markets, managing currency risk is as vital as managing asset-specific risk, necessitating the use of sophisticated hedging strategies and stable monetary policies to ensure long-term financial stability.
Keywords
Bidirectional Relationship, Capital Flows, Currency Risk, Emerging Economies, Exchange Rate Volatility, Flow- Oriented Model, International Finance., Portfolio Balance Approach, Stock Market Returns