The determinants of the dynamic correlation between foreign exchange and equity markets: Cross-Country comparisons

Tshikalange, Mulanga and Bonga-Bonga, Lumengo (2023): The determinants of the dynamic correlation between foreign exchange and equity markets: Cross-Country comparisons.

Abstract

This paper investigates the factors driving the exchange rate-stock return nexus and compares developed and emerging countries. The paper uses a MDCC-GJR-GARCH model to capture the correlation between exchange rate and stock return in 20 randomly selected emerging economies and 23 developed economies for the period 2011-2021. In addition, a dynamic panel model is employed to test the significance of the explanatory variables, that is, VIX, Market Capitalisation to GDP, (RINT), and Global Growth. The empirical results revealed that the level of development matters, developed countries’ correlations are mainly influenced by VIX, Global Growth, and Market Capitalisation to GDP variables whereas emerging markets are driven by VIX and RINT. The drivers in both country groups represent both global and local factors. The findings of this research are important to international portfolio investors when diversifying their investment portfolios and to policymakers

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic correlation, exchange rate, equity returns, developed and emerging economies.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets

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