Is There a Contemporaneous Relation between Exchange Rates and Stock Prices? Evidence from Decisions to Allow the Mexican Peso and Thai Baht to Float

Abstract

This paper estimates short horizon exchange rate sensitivity with an event study methodology. We look at stock price reactions to very large, unexpected exchange rate changes: the decisions to allow the Mexican peso and Thai baht to float. For both events, we find evidence of a statistically and economically significant contemporaneous relation. Our findings are consistent with the premise that the inability of much of the prior research to observe a contemporaneous relation between exchange rates and company value is due to methodological issues.

Keywords: Exchange rate sensitivity, hedging, price reaction, event study

JEL Classification: F3, F4, F2