Empirical Finance

Pembroke-King's Programme 2012

Advanced Empirical Finance

Final Empirical Project

Maggie Lin

Introduction

In this paper I will look into the relationship between exchange rates and stock prices, more specifically, how the exchange rate influences the prices of stocks in the a stock exchange. Also, I will make comparison between different countries, focusing on U.K., Europe, and U.S.

I'm particularly interested in this part because I had the chance to look into Eurozone crisis in my previous economic course and seeing how the exchange rate between U.K. and Europe, U.K. And U.S., and Europe and U.K fluctuated along with time and events. In this class, we've learned about the calculation of stock returns, so I want to connect the two together and see if tere's an apparent relationship between them.

Data

I randomly chose four companies, Sainsbury's, Zara (Inditex), BMW and British Petroleum for my comparison. I retrieved data from yahoo finance using the historical prices of J. Sainsbury plc (SBRY.L), Industria De Diseno Textil SA (ITX.MC), BMW (BMW.F), BP plc (BP). They are traded in London Stock Exchange, Madrid Stock Exchange, Frankfurt, London Stock Exchange respectively.

I retrieved the historical exchange rate data from oanda.com.

I chose the time spam of four years using the most recent data starting from August 1, 2008 to August 1, 2012.

Methodology

After I researched on the topic of the relationship between exchange rates and stock prices, I found that many studies have suggested that exchange rate is influenced by stock return. In the research “Is exchange rate volatility influenced by stock return volatility?” conducted by Angelos Kanas, he studied the relationship by using the daily closing stock values in local currency for U.S., U.K., and Japan for the period from 1 January 1986 to 28 February 1998. The exchange rate series he used are the Bank of England trade-weighted exchange rates. His...