Abstracts Business

The interaction between exchange rates and stock prices

by Wei Mao

This doctoral thesis aims to contribute to the interaction between exchange rates and stock prices at firm level, using a large unbalanced panel consisting UK non-financial companies over the period 1990—2011. There are six chapters. After the Introduction, Chapter 2 critically and comprehensively reviews previous theoretical and empirical studies of the relationship between exchange rates and stock prices, and then suggests several new research ideas. Chapter 3 derived a theoretical framework for the transmission channels through which changes in exchange rates pass-though into stock prices. The model is then calibrated to provide implications. Two main transmission channels are identified: the revenue-side channel and the cost side channel. The findings show that the effect through the revenue-side channel can explain more than 80% of currency exposures, while less than 20% can be explained by impact through the cost-side. Chapter 4 develops an empirical model to provide evidence for the theoretical framework in Chapter 3. Meanwhile, this chapter also examines how firms’ characteristics have an impact on identified transmission mechanism. Chapter 5 distinguishes the unanticipated parts of exchange rate variations from the anticipated ones, using more advanced return decomposition techniques and VAR specifications. To be specific, foreign exchange beta is decomposed into foreign exchange beta due to unanticipated changes in cash flows and discounted rates. The key findings, contributions and limitations are given in Chapter 6, as well as new research ideas for the future.