Movement in Exchange Rate on International Trade: Stock Markets

Javeria Anwar
Introduction:
The effect of change in exchange rate on worldwide trade and economy has become a major part
of investigation since the breakdown of Bretton woods system. Exchange rate movement normally
has many kind of impact on the economy. The international trade has an impact upon both the
income of worldwide trade and the volume of trade; the international trade has a strong relation
with these changes (Asteriou et al., 2016). Many researchers did study on the exchange rate
movement and global trade. Some studies investigate that the amount of international trade will be
reduce if the change in exchange rate is increase (Baron, 1976). The major results of some studies
are that the number of trade is considered affected by the change of exchange rate. The key element
that affect the exporter’s income is the exchange rate. Exporter’s income rise with the increase in
exchange rate movement. An increase in profit risk limits the advantages as well as the size of
trade worldwide since exporters are risk harmful and it is expensive or difficult to cover against
exchange rate risk. The size of internationally trade will reduce if exchange rate movement is
increase (Franke, 1991).
Stock markets becoming more interconnected in both worldwide and locally. Nevertheless, there
is still too much to learn about the nature of the connection and transformation through the stresses
dissipate (Ehrmann et al., 2011). Knowing that exchange rate is important economic factor, and
both the distribution of resources and economic growth are impacted by the level of movement.
Depending on a variety of circumstances, including the choice of monetary regime and the growth
of the financial sector, countries may try to control the level of exchange rates and limit their
flexibility. By decreasing the demand for borrowing in foreign currencies, they help to minimize
differences in currencies and expand local financial markets. However there is opposite
relationship among the growth of financial markets and the level of exchange rate movement
(Gadanecz & Mehrotra, 2013). International financial markets are mostly depended by the effect
of size and demand. The stock price of a company from a small nation increases when it lists its
shares in a larger financial market. Stocks from developing market exchanges go to important
global economies. Additionally, the size of a nation has a significant role in determining
international financial asset exchange (Martin & Rey, 2004).
Exchange rate movement impact on the value of worldwide trade gets a lot of attention in globally
economics. Although the theories estimates that the correlation between exchange rate movement
and worldwide trade is negative, like the study of (Doğanlar, 2002) or (Arize, 1997) ,but according
to the empirical studies they said that not always the theoretical statement will be valid , see (Broil
& Eckwert, 1999) or (Kroner & Lastrapes, 1993). On the basis of the theoretical and empirical
data arguments, the major purpose of this study is to investigate the relation between international
trade and exchange rate movement , and how stock markets is effected by exchange rate fluctuation
and its impact on the worldwide trade for the some Asian emerging economies Pakistan, India,
Bangladesh, Nepal , Japan, Sri lanka.
Examining the available background, this study intends to look into and clarify the movement of
exchange rate on international finance, and how stock market perform moderation effect. This
paper is organized as follows. Section 2 tells the reviews of previous studies. Section 3 explains
methodology and presents an overview of framework. Section 4 reports on results, and Section 5
concludes the argument.
Literature Review:
The connection between international trade and exchange rate movement has been investigate by
a number of empirical and theoretical studies. Past empirical research examined the hypothesis
and test solidity. The theoretical framework support both positive and negative connection between
international finance and exchange rate movement. It will be predicted that exchange rate
movement has negative or positive effect on international trade and stock markets. The empirical
studies are fail to provide the final findings, but some empirical findings show the negative
relationship, although this relationship is not always strong.
(McKenzie, 1999) did a survey on how trade activity effected by movement of exchange rate
movement. Their literature generally suggests that there is a pending issue. Theoretically, scholars
have developed models that show the positive and negative effects of exchange rate movement on
international trade. Where a statistically significant relation has been find, they show a random
positive and negative relationship. In (Hayakawa & Kimura, 2009) paper they examine
experimentally, the connection between exchange rate movement and international trade, in East
Asia. The summary of findings is first they find, the exchange rate fluctuation discourages trade
within East Asia more severely than it does outside the area. A significant contributing factor to
the demotivation is the exchange of intermediate commodities throughout foreign business
networks. They also find that in East Asia, the negative impact of volatility exceed that of taxes
but is less than that of expenses associated to distance, many of negative impacts of volatility are
variables unique to a certain nation that change throughout time. At last, their simulation research
shows that compared to free trade, the adoption of a group currency or a single currency would
have a greater positive effect on international trade.
The (Sercu & Uppal, 2003) examine the relationship, taking both variables as endogenous,
between the amount of international finance and exchange-rate fluctuation in a general-
equilibrium stochastic-endowment economy with imperfect international commodities markets.
For this, they create a model of a stochastic general-equilibrium economy that includes global
commodities markets that are split in part due to transportation expenses. They claim that it is lies
to connect trade and exchange rate movement as though one were exogenous when they are both
endogenous variables. According to a very basic model, trade and exchange rate variance may
have a positive or negative relationship, depending on what causes the rise in fluctuation.
According to the (Bahmani-Oskooee et al., 2023) it is highly necessary to study the trade flows
between Pakistan and China and their reaction to rupee–yuan fluctuation. The main goal in this
study is to determine if trade flows react equally or irregularly to fluctuation. The analysis is done
on annual data from 1980 to 2018 for 14 industries in Pakistan that export to China and 34
industries that import from China. The findings show that they discovered short-run impacts of the
actual rupee-yuan volatility on imported goods of 19 industries and exports of 10 industries when
they estimated a straight-line export and import market model for every sector. In four exporting
industries and ten importing industries, the short-run impacts developed into long-run significant
and relevant results. Their findings have industry-specific effects that traders in each sector should
take attention to individually.
(Mun, 2007) examine by developing a direct model for the significance of these fluctuations in
international stock markets, to know how and to how much variations in exchange rates affect
movement and correlations in equity markets and builds a clear. The data of study shows that the
US stock market experiences a drop in fluctuation, while local stock market movement is primarily
increased by increasing foreign exchange rate fluctuation. The results show that the connection
between the US and local equity markets is slightly reduced by larger exchange rate movement.
Based on their model, their empirical data show that local equity market movement is mostly
increased by larger exchange rate fluctuation. The empirical results may be explained by the
positive return connection between the foreign currency market and domestic equities. The
(Sichoongwe, 2016) investigates the impact of fluctuating exchange rates on Zambia's stock
market. For this study, time series data from the years 2000–2015 were used, to determine the
relation between exchange rate volatility and stock market returns, the GARCH model has been
used. The results show that the stock markets return and exchange rate movement has a negative
relationship. Their study tells that the Zambia's stock market is affected by the state of the world
economy. Therefore, the Zambian stock market is significantly impacted by exchange rate
movement.
According to (Nezky, 2013) their study examine the effects of the 2008 US financial crisis on the
Indonesian economy , by use the Structural Vector Auto regression (SVAR) model. The empirical
results of their study finds that the US financial crisis has had a major effect on Indonesia's capital
market. Accordance with the idea that worldwide capital markets continue to have a significant
impact on Indonesia's capital market, meaning that domestic investors will likely get concerned in
the event of a significant shock to foreign stock indexes. The (Mahdavi & Bhagwati, 1994) stated
that they analyses the impact of cost-bused dumping and the ensuing trade agreements between
the US and Japan on US semiconductor companies by using stock market data. The empirical
findings showed that the first signs of dumping by Japanese semiconductor companies
significantly affected the stock prices of US companies negatively. However, the subsequent
market-sharing trade agreement, which saw the US agree to halt the imposition of antidumping
duties and Japan agree to prohibit the dumping of chips made in Japan in the US, had a favorable
effect on the stock prices of US semiconductor companies.
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