The Relationship between Stock Prices and Exchange Rates in Sweden

Abstract: This paper empirically investigates the exchange rate effects of Swedish krona against euro (SEK/Euro) on stock prices in Sweden. The sample period for the study has been taken from March, 2001 to March, 2011 using monthly nominal exchange rate of SEK/Euro and monthly closing values of OMX Stockholm All Share (OMXPI) Index. The developed unit root test and cointegration technique have been applied for the research. It was found that both data series were nonstationary and integrated of order 1. The test result also showed there was no cointegrating relationship between stock prices and exchange rates. Further investigation into their contemporaneous relationship highlighted a statistically significant negative linear relationship between the said variables, suggesting that an appreciation of the Swedish krona against euro leads to a contemporaneous increase in the value of the Swedish stock market.