Exchange Rate And Stock Market Development In Bangladesh

With the acceleration of globalization and increasing economic interdependence, the association between stock market development and foreign exchange rate is attracting attention from the policymakers. This study examines the cointegrating relationship between stock market development and the nominal exchange rate for Bangladesh over the period 1980-2019, controlling for trade openness, and domestic and foreign price levels. The bounds testing approach to cointegration analysis is applied. Results indicate the existence of a cointegrating relationship between nominal exchange rate and stock market development. The significantly positive long-run effect of an increase in the nominal exchange rate on stock market development suggests that depreciation in Bangladeshi Taka will enhance stock market development. The short-run effect of an increase in the exchange rate on stock market development is, however, significantly negative. The results, overall, confirm that foreign exchange rate is an important factor in determining stock market development in Bangladesh.