The effect of foreign exchange position on the stock performance

In its simplest definition, the exchange rate refers to the value of the national currency against a foreign currency. With the development of technology globalization has also increased and as a result, the importance of the exchange rates has also increased. With this respect, in an environment where economic uncertainty has increased with the effect of globalization, exchange rates have become one of the important indicators of the success of an economy. The purpose of this thesis is to investigate whether the sudden increases and decreases in the exchange rates has an effect on stock prices. In this context, event study methodology is used and corporations in 18 different industries whose stocks are included in BIST100 index in the years 2015-2017 are selected. Sixteen event days are determined on which sudden increase or decrese in USD exhange rate occured. As required by the event study average abnormal returns are calculated for the event window and cumulative average abnormal returns are calculated for certain intervals. Market model is used to calculate the expected (normal) returns. Parameters of the market model are estimated by running regression models. The values of the dependent and independent variables of the regression models come from the estimation window. It is expected to observe statistically significant negative abnormal returns on the day or the following days when sudden increase in the USD exchange rate occurs. Contrary, it is expected to observe statistically significant positive abnormal returns on the day or following days when sudden decrease in the USD exchange rate v occurs. It is also expected to observe cumulative average abnormal returns in line with above- mentioned expectations. We did not obtain sufficient statistically significant evidence from the event study to support our expectations. So, we can say that stand-alone effect of the sudden increase and decrease in foreign exchange rates on stock prices do not exist.