Exchange rates are a prominent macroeconomic variable that exposes emerging stock markets to international economic risks. This study attempts to understand and explain stock market returns and exchange rate dynamics in the progressive emerging market group of Asia. The study applies the ARDL modelling technique and Granger causality test to monthly time-series data. It finds that import-dominated countries (India, Indonesia and Turkey) have positive exchange rate coefficients while for export-dominated countries (China), an increase in real effective exchange rate affects stock returns negatively. Causality analysis reveals informational inefficiency among the sample countries except for Indonesia, because exchange rate movements lead stock prices. The study concludes that the exchange rate is highly significant for investors (global and domestic) and policymakers in the Asian economies reviewed, who focus on it to better diversify their portfolios.

Exchange rates are a prominent macroeconomic variable that exposes emerging stock markets to international economic risks. This study attempts to understand and explain stock market returns and exchange rate dynamics in the progressive emerging market group of Asia. The study applies the ARDL modelling technique and Granger causality test to monthly time-series data. It finds that import-dominated countries (India, Indonesia and Turkey) have positive exchange rate coefficients while for export-dominated countries (China), an increase in real effective exchange rate affects stock returns negatively. Causality analysis reveals informational inefficiency among the sample countries except for Indonesia, because exchange rate movements lead stock prices. The study concludes that the exchange rate is highly significant for investors (global and domestic) and policymakers in the Asian economies reviewed, who focus on it to better diversify their portfolios.