Exploring the Relationship between Stock Market and Exchange Rate in Hong Kong
Song Yang
Co-Presenters: DE CHEN Wang
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Nazif Durmaz
Abstract:
The interplay between stock market performance and exchange rate fluctuations remains a critical area of financial and economic research. In Hong Kong, a highly open and globally connected economy, understanding this relationship is crucial due to its unique monetary system and exposure to international markets. This study addresses the gap in sector-specific analyses over extended periods that encompass significant economic events.This research examines the dynamic relationship between the stock market and exchange rate in Hong Kong, focusing on twelve major industries from Q1 2005 to Q2 2024. Using quarterly data, the study employs both Autoregressive Distributed Lag (ARDL) and Non-Autoregressive Distributed Lag (NONARDL) methodologies to capture linear and nonlinear interactions between four key variables.The ARDL approach reveals short- and long-term equilibrium relationships, while the NONARDL models uncover nonlinear dynamics. The findings demonstrate significant variations in the stock-exchange rate relationship across industries, highlighting how exchange rate fluctuations impact sectoral stock performance differently. Industries with higher exposure to international markets exhibit stronger sensitivity to exchange rate changes.This research enhances the understanding of exchange rate volatility’s influence on Hong Kong’s stock market, providing valuable insights for policymakers and investors. Future research could incorporate additional macroeconomic variables or explore structural breaks within the timeframe to deepen the analysis.