I am looking for some references on the relationship between the stock market and the exchange rate, both from the empirical and theorical side.

Is there any theory which suggests a relationship between the two series (e.g ftse100 and USD/GBP)?

A simple reasoning is that a rise in the stock market driven by foreign capitals flowing inside the country should lead to an appreciation of the currency, due to an increase of the demand of the domestic currency (for a fixed supply).

On the other side, a depreciation of the currency might cause more export, higher profits and therefore might lead a rise in the stock market.

Do you know other channels which might explain why one of the two series theoretically leads the other one?

  • $\begingroup$ You might like to look at the closing share prices and exchange rates on 23 and 24 June 2016 in the UK (Brexit referendum result happened overnight) and the explanations given at the time $\endgroup$ – Henry Apr 4 at 23:15

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