The influence of stock markets on the exchange rate for several countries can be described by a relationship similar to the interest rate parity. The relationship between stock markets and exchange rates is evaluated by using a VECM and variance decomposition. The relationship between stock market returns and exchange rates is shown to be long term for a panel of 17 countries. It is also shown that stock markets influence the variance of exchange rates.
stock markets, exchange rates, international finance, variance decomposition.