The increased influece of equity markets on currency forecasting techniques

Introduction 2 1 Introduction Not so many years ago, starting a study on exchange rates could be considered just a way to trace macroeconomic models or to satisfy the academic curiosity of a few economic specialists and international traders. Surely, exchange rates determination was confined as an arcane interest which even the vast majority of decision makers might safely ignore. Nowadays, there should be no need to justify devoting a thesis to the subject, since it increasingly affects economic lives. To some extent, the risen importance attached to interest rates is due to the internationalization of modern business, the continuing growth in world trade relative to national economies, the trend towards economic integration (in Europe, at least), and the rapid pace of change in the technology of money transfer. Moreover it is also in large part a consequence of the fact that exchange rates are not only variable, but highly volatile, therefore very hard to forecast. Each day, more than $1.2 trillion worth of foreign exchange changes hands around the globe, an amount that far exceeds the daily value of world trade. Relatively small changes in the prices at which these trades occur, exchange rates, can have immediate and profound effects on economic events, ranging from family vacations to corporate profits. Large changes can shake governments, as demonstrated in Southeast Asia. Yet, despite the importance of exchange rates, most people find their behavior unfathomable.