Do Exchange Rate Changes Have Symmetric or Asymmetric Effects on Stock Prices?

This study employs the bounds testing approach to cointegration to examine the short run and long run dynamics between stock prices and exchange rates, accounting for few other macroeconomic variables such as Consumer Price Index, Industrial Production Index, nominal money supply (M2) which are known to have effects on stock prices as well. The main contribution of this paper which is absent in the literature is that the change in nominal effective exchange rate is decomposed into partial sum of positive changes and negative changes to determine whether the changes in exchange rates have symmetric or asymmetric effects on stock prices. The analysis is applied to both developed and developing countries over the period of 1973-2015. The results show that the effect of exchange rate changes is asymmetric on stock prices. Furthermore, I disaggregate data at the sectoral level for the U.S. stock market to investigate the performance of different sectors due to changes in macroeconomic variables and results show that different sectors react differently to changes in macroeconomic variables and exchange rate changes have asymmetric effects on the stock price indices of different sectors in the U.S