Sharemarket performance and the New Zealand dollar : inside the relationships : a thesis presented in partial fulfilment of the requirements for the degree of a Master of Applied Economics, Massey University, Palmerston North, New Zealand

Abstract

New Zealand is often described as a small open economy with substantial foreign ownership of its assets. The economy is therefore sensitive to exchange rate movements and the sharemarket being the barometer of economic activities should be no exception. Further, exchange rates may also be endogenous to sharemarket fluctuations. This thesis analyses the relationship between the value of the New Zealand dollar vis a vis the currencies of its five largest trading partners and the New Zealand sharemarket performance between 1999 and mid-2005 using the vector autoregression (VAR) and vector error correction model (VECM) approaches. Findings from the research suggest the New Zealand sharemarket is robust to currency fluctuations in both the short- and long- term. The only exception to this is the New Zealand dollar-Australian dollar exchange rate (NZD/AUD), which has a negative short term effect on the sharemarket. The NZD/AUD is also the only exchange rate to depreciate following a positive shock to the sharemarket.