Effects of size and international exposure of the US firms on the relationship between stock prices and exchange rates

This paper investigates relationship between US stock prices and exchange rates controlling for the firm size over a period 1987-2005 using Granger causality methodology. We find Grainger causality from large-cap stocks to the exchange rate, but no causality for the small-cap stocks. This supports previous findings that global integration might be confined to large multinational corporations. Our analysis suggests that nature of the relation changes over time. The points of reversion correspond to the periods of major changes in US Federal Reserve Policy. Results for the sub-periods identified support the hypothesis of changing causality between exchange rate and stock prices.