Exchange Rate and Economic Performance - A Comparative Study of Developed and Developing Countries

Abstract

The most significant and crucial goal of the developing and developed countries is to attain continued economic and financial growth and stability through stock market performance. The aim of the present research is to analyze the impact of the changes in foreign exchange rates on economic performance of developed and developing economies measured by the changes in the stock market returns. The study is focused to explore whether and to what extent foreign exchange rates affect the economic performance as measured by the stock market returns. The significance of the study is evident from the fact that the portfolio managers and investors are usually interested in making prudent investment decisions so as to maximize their returns through keeping an eye on various domestic and international factors affecting their returns. Moreover developed and developing countries are also interested in stabilizing and enhancing the economic growth by monitoring and controlling the factors affecting such growth. The study considered the variables from Pakistani and Japanese markets to see whether the studied variables have any explanatory relationship that may help in formulating policies to enhance and stabilize economic growth. The study took 10 years monthly data related to stock prices of KSE 100 index and NIKKEI 225 index as dependent variable, whereas monthly data of foreign exchange rates of Pakistan and Japan are taken as independent variable. The study used descriptive and inferential statistics to identify and measure the relationship between foreign exchange rates and economic performance. The results depicted that foreign exchange rate is negatively associated to stock market returns and that the exchange rate is an insignificant predictor of stock market returns in case of Pakistani market hence the changes in foreign exchange rate were found to have no effect on economic performance as measured by the stock market returns. In case of Japan foreign exchange rate was found significantly and positively affecting stock market returns and that the changes in foreign exchange rate will also cause changes in stock market returns with an increase in exchange rate causing an increase in economic performance and a decrease in exchange rate causing a decrease in economic performance. Keywords: Stock Returns, Economic Performance, NIKKEI 225, KSE 100