The Dynamic Relationship Between Stock Prices and Exchange Rates: Evidence from Four Transition Economies (original) (raw)
Related papers
The paper aims to examine the causal relationship between the stock prices and exchange rates in Hungary, Czech Republic, Poland and Romania. The investigation employs Granger's Causality test and Vector Auto Regression technique on monthly stock return and the foreign exchange rate for the period October 31, 2008 to September 18, 2017. The major findings of the study that there is no Granger's causality between the exchange rate return and stock return in these countries. The study also uses Vector Auto Regression modeling to confirm that though stock return and exchange rate are related to each other but any consistent relationship does not exist between them. Our results have provided beneficial information for investors, government policies and researchers.
ЗБОРНИК РАДОВА ЕКОНОМСКОГ ФАКУЛТЕТА У ИСТОЧНОМ САРАЈЕВУ, 2015
This paper analyzes the interdependence between stock market indices and exchange rates in four transition countries: Croatia, Serbia, Hungary and the Czech Republic. The analysis is based on monthly data for the nominal exchange stock market indices and nominal exchange rates over the period from March 2010 to March 2015. The main objective of this work is to determine whether the exchange rates had a significant impact on future trends in the capital markets and vice versa. Empirical analysis has shown that the series are stationary in the first differences, and using both Engle-Granger cointegration and Granger causality test it has been shown, as well, that there is neither long-run nor short-run relationship between these two variables. In other words, it means that prediction of movement of one variable cannot be based on past values of other variable
On the dynamic link between stock prices and exchange rates: evidence from Romania
2007
The theoretical linkages between exchange rates and stock prices are microeconomic as well as macroeconomic in nature and may be observed on the short-and long-run. The paper examines the interactions between the exchange rates and stock prices in Romania, after 1997, taking into account the change in the monetary regime occurred in 2005 -the shift towards inflation targeting. The analysis uses bivariate cointegration and Granger causality tests, applied on daily and monthly exchange rates and stock prices data collected over the 1999 to 2007 period. Three types of exchange rates are used: the nominal effective exchange rates of the Romanian leu, the bilateral nominal exchange rates of the leu against the US dollar and the euro, and the real effective exchange rates of the leu. In terms of stock prices, the BET and BET-C indices of the Bucharest Stock Exchange are used, denominated in the local currency.
This paper investigates the differences in structures of causal relationships between stock and currency markets for advanced and emerging economies on the example of Switzerland and Poland. The bootstrap-based linear causality analysis as well as nonlinear causality tests were conducted for both considered countries. Results of linear causality analysis indicated that for Swiss economy the portfolio approach seems to be the right pattern while for Poland the traditional and portfolio approaches were found to be appropriate. On the other hand the results of nonlinear analysis provided solid basis to claim that for Switzerland both approaches are acceptable while for Poland nonlinear causality was not reported in any direction. Results of nonlinear causality test were generally unchanged after GARCH(1,1) filtration. The existence of strong causal links from stock to currency markets of both economies seems to have a practical application for investors helping to hedge their portfolios against currency shocks.
On the causality between stock prices and exchange rates: evidence from Turkish financial market
Problems and perspectives in management, 2017
The aim of this paper is to investigate the existence and direction of relationship between stock prices and exchange rates for Turkish financial market. Granger (1969) causality testing methodology was employed to reveal the nature of relationship between the two variables. This work contributes to the existing body of literature in the way that in Turkish financial market, there is a uni-directional causality running from stock prices to exchange rates using the daily observations for the sample period, which runs from February 23, 2001 to November 4, 2009. Also, the model used in this study extends the scope of exchange rate variables including a total of five currencies US dollar, Euro, Japanese Yen, Pound Sterling, Swiss Franc and two baskets of currencies of Undersecretariat of Foreign Trade of Turkey. This evidence has implications for the policy makers and economic actors to perceive the movements in stock prices as a dynamic determinant, which may affect the success of their exchange rate policies.
Cointegration analysis of stock market index and exchange rate: The case of Serbian economy
Anali Ekonomskog fakulteta u Subotici, 2021
Since the late 90's, the existence and direction of causality between the capital market and foreign exchange market have attracted significant attention of theoretical and empirical researchers. This is because both of these financial variables have an indisputable role in the development of each country's economy. In this paper we use Johansen procedure and Granger causality test to examine the existence and direction of short-run and long-run dynamics between the leading stock market index BELEX15 and RSD/EUR exchange rate in Serbia. Using ADF test we find that both series are integrated of order one, and since the value of Johansen trace statistics confirmed the existence of cointegration, we have proceeded with estimation of the VECM model. According to our VECM model, the BELEX15 index adjusts to the long-run equilibrium relationship at a rate of 11.72% in each period, while the exchange rate adjusts to the long-run equilibrium relationship at a rate of 2.73%. We also ...
Dynamic Nexus between Exchange Rate and Stock Prices in the Major East European Economies
Prague Economic Papers, 2016
This paper investigates the dynamic conditional correlation (DCC) between stock returns and exchange rate in four East European emerging markets. Due to persistent long memory and the presence of the asymmetric effect in all asset markets we applied DCC-FIAPARCH model. The estimated negative DCC parameters in all scrutinized countries confirmed that portfoliobalanced theory has predominance in the short run in all selected economies. DCC parameters revealed significant time-varying behaviour, especially during the major crisis periods. By embedding dummy variables in the variance equations, we came to the conclusion that global shocks affect the volatility of DCCs. Particularly, it happened during the Global Financial Crisis and European sovereign debt crisis, but the effects were not linearly equal in all countries. Complementary rolling analysis unveils how conditional volatilities of analysed assets influence DCC. The results suggested that exchange rate conditional volatility ha...
On the Dynamic Relation Between Stock Prices and Exchange Rates
Journal of Financial Research, 1996
In this study we apply recent advances in time‐series analysis to examine the intertemporal relation between stock indices and exchange rates for a sample of eight advanced economies. An error correction model (ECM) of the two variables is employed to simultaneously estimate the short‐run and long‐run dynamics of the variables. The ECM results reveal significant short‐run and long‐run feedback relations between the two financial markets. Specifically, the results show that an increase in aggregate domestic stock price has a negative short‐run effect on domestic currency value. In the long run, however, increases in stock prices have a positive effect on domestic currency value. On the other hand, currency depreciation has a negative short‐run and long‐run effect on the stock market.
The Comovement of Exchange Rates and Stock Markets in Central and Eastern Europe
Sustainability
This paper analyses the link between exchange rates and stock markets in four Central and Eastern European countries. We simultaneously explore the comovements of foreign exchange markets and stock markets at the cross-country level and the link between these two markets within each country while employing a Dynamic Conditional Correlation Mixed Data Sampling (DCC-MIDAS) model. Such an approach to financial markets conveys a much more visible picture of the existing patterns of financial integration between these markets that would otherwise be neglected. The estimates reveal significant differences between the patterns of correlation in our sample countries. First, the paper finds a quite low degree of convergence between foreign exchange markets, with rising correlations during some of the crisis episodes. Second, both the 2004 European Union enlargement and the European sovereign debt crisis underpin the stock market comovements in the Central and Eastern European countries. Thir...
Dynamic relationship between stock prices and exchange rates for G-7 countries
The Quarterly Review of Economics and Finance, 2002
This paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long-run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors.