Uncovered Equity Parity states that countries with equity markets expected to outperform must experience currency depreciation. Using a sample of 43 countries from November 1983 – September 2011, the authors of this study sorted the equity markets according to their expected return differentials with the US markets. Returns are forecast using dividend yields, term spreads and 12-month momentum. They found that the FX rates and the domestic equity markets are as closely related as chalk and cheese.
Title: What Do Stock Markets Tell Us About Exchange Rates? Authors: Gino Cenedesey, Richard Paynez, Lucio Sarnox, Giorgio Valente
Source: Social Science Research Network