THE IMPACT OF FOREIGN EXCHANGE RATE ON SET INDEX

Abstract

The Stock Exchange of Thailand (SET) index usually fluctuates in accordance with foreign investments. One factor affecting the profits of foreign investors is foreign exchange rates. This study aims to explore the cointegration between exchange rates and SET index. The findings can be used as the information towards decision making for trading in the SET. The study uses secondary data collected since January 2003 until June 2013 for the total of 126 months. The data consists of the SET index, the exchange rates of THB/USD, JPY/USD and USD/EUR. Employing a cointegration test, The findings reveal that the exchange rate of THB/USD and USD/EUR are cointegrated in the opposite directions. In other words, when the U.S. or European Union economy slows down, the U.S. dollar or the Euro weakens and capital flows to Asia causing Thai Baht stronger and the SET index increases. In contrast, when the U.S. dollar or the Euro strengthens, the capital will flow out of Thailand causing the SET index goes down. It is also found out that the exchange rate of JPY/USD is not cointegrated with the SET index. Therefore, investors can use make use of the information about exchange rates when making decision for investment in the SET.