THE EFFECTS OF EXCHANGE RATE CHANGES ON THE CO-MOVEMENT OF EQUITY MARKETS

This paper analyzes the co-movement of the US equity market and 10 markets in Asia and Oceania (i.e., referred to as domestic markets). We find that the daily returns of the ten emerging markets are significantly correlated with the performance of US market in the previous trading day. Also, we analyze the contemporaneous change in the US/domestic market exchange rate, and how it affects this co-movement. We find that the correlation between the US market and domestic markets is positively related to the net-trade balance that exists between these countries. Countries that tend to net-export to the US are affected more positively by the strengthening of the US dollar compared to the domestic currency.