Impact of the Foreign Exchange Rates Fluctuations on Returns and Volatility of the Bucharest Stock Exchange

This paper explores the influence of the foreign exchange rates variation on the returns and volatility of the stock prices from the Romanian capital market for the period of time January 2000 - December 2012. This period was split in four sub-samples corresponding to different stages of the Romanian financial markets evolution. The GARCH models employed in this investigation provided different results. For the transition period January 2000 - December 2007 we found no evidence of the foreign exchange market on the Bucharest Stock Exchange. During a period of time between the Romania’s adhesion to European Union and the announcement of Lehman Brothers’ bankruptcy the results indicate a significant impact of the foreign exchange rates on the stock returns. For the period from September 2008 to February 2010 we find that foreign exchange rates influenced not only the stock returns but also their volatility. However, between March 2010 and December 2012 the impact of the foreign exchange market on the Romanian capital market was limited to the returns. We conclude that influence of the foreign exchange rates variation on the returns and volatility of the stock prices depended on the factors such as the foreign capitals inflows, the global crisis effects and the perceptions of the national economy.