Stability in Exchange Rate and it's Effect on a Country's Financial Market

As witnessed many times in the past decades, significant exchange rate volatilities constantly take place and are usually accompanied by either global or domestic economic recessions. The relationship between stability in exchange rate and a country’s economic development has long been discussed by researchers and analysts, with a traditional view that more stable exchange rates would often promote trades and foreign direct investments, and thus it is better to avoid exchange rate volatilities. However, while many empirical studies have been conducted, we still have relatively limited knowledge in to what extent and in which ways can volatilities in exchange rates affect a country’s stock index, foreign direct investment flow and net trades and there affect the overall financial performance. This paper reviewed some of the existing theories concerning exchange rate stabilities and made further investigations to the effects of exchange rate volatilities on selected countries’ stock indices, FDI flows and net trades.