On the relationship between exchange rates and equity returns: A new approach

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38 Citations (Scopus)


This paper employs a new approach in order to investigate the underlying relationship between stock markets and exchange rates. Current approaches suggest that the relative equity market performance of two countries is linked to their exchange rate. In contrast, this study proposes an alternative approach where one global variable - global equity market returns - is believed to have an effect on exchange rates, with the relative interest rate level of a currency determining the sign of the relationship. Our empirical findings suggest that exchange rates and global stock market returns are strongly linked. The value of currencies with higher interest rates is positively related with global equity returns, whereas the value of currencies with lower interest rates is negatively related with global equity returns.
Original languageEnglish
Pages (from-to)550-559
Number of pages10
JournalJournal of International Financial Markets, Institutions and Money
Issue number4
Publication statusPublished - 1 Oct 2011


  • exchange rates
  • foreign exchange
  • interest parity
  • risk premia
  • stock returns


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