Considerations on the relantionship between exchange rates and stock markets in Eastern Europe in time of crisis

Lupu, Dan and Asandului, Mircea (2014): Considerations on the relantionship between exchange rates and stock markets in Eastern Europe in time of crisis. Published in: Transformations in Business & Economics , Vol. 13, No. 3C (33C) (30 September 2014): pp. 430-445.

Abstract

This paper investigates the relationship between exchange rates and stock markets for 4 East-European countries, using a sample of 3,500 daily returns during the period 2000-2014. The research method used is Bayesian VAR for the solution of degrees of freedom specific to the VAR technique and the increased forecast probability of economic variables. For the foreign exchange markets we found interdependence relationships between the exchange rates and the short-term capital markets, these relationships manifesting more strongly and in the long run during the economic crisis periods.

• Item Type: MPRA Paper
• Language: English
• Keywords: crisis, exchange rate, stock markets, interdependence, impulse functions, Eastern European countries
• Subjects: G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

References

Aggarwal, R. (1981), “Exchange-rates and stock-prices-A Study of the United-States Capital-Markets under Floating exchange-Rates”, Akron Business and Economic Review, Vol. 12, No 3, pp.7-12.

Ajayi, R.A., Friedman, J., Mehdian, S.M. (1999), “On the relationship between stock returns and exchange rates: tests of Granger causality”, Global Finance Journal, Vol. 9, No 2, pp.241-251.

Amihud, Y. (2002), “Illiquidity and stock returns: cross-section and time-series effects”, Journal of financial markets, Vol. 5, No 1, pp.31-56.

Andries, A.M., Ihnatov, I., Tiwari, A.K. (2014), “Analyzing time-frequency relationship between interest rate, stock price and exchange rate through continuous wavelet”, Economic Modelling, Vol. 41, pp.227-238.

Bahmani-Oskooee, M., Sohrabian, A., (1992), “Stock prices and the effective exchange rate of the dollar”, Applied economics, Vol. 24, No 4, pp.459-464.

Busch, T., Christensen, B.J., Nielsen, M.Ø. (2011), “The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange, stock, and bond markets”, Journal of Econometrics, Vol. 160, No 1, pp.48-57.

Butt, B.Z., Rehman, K.U., Azeem, M. (2010), “The causal relationship between inflation, interest rate and exchange rate: the case of Pakistan”, Transformation in Business & Economics, Vol. 9, No 2, pp.95-103.

Choudhry, T. (1994), “Stochastic trends and stock prices: an international inquiry”, Applied Financial Economics, Vol. 4, No 6, pp.383-390.

Climent, F., & Meneu, V. (2003). “Has 1997 Asian crisis increased information flows between international Markets”. International Review of Economics & Finance, 12(1), pp.111-143.

Corhay, A., Tourani Rad, A., Urbain, J.P. (1993), “Common stochastic trends in European stock markets”, Economics Letters, Vol. 42, No 4, pp.385-390.

Dajčman, S., Kavkler, A., Festić, M. (2013), “Long-range dependence in the returns of three Central and Eastern European stock markets-a time-varying analysis”, Transformation in Business & Economics, Vol. 12, No.1, pp.206-220.

Dickinson, D.G. (2000), “Stock market integration and macroeconomic fundamentals: an empirical analysis, 1980-95”, Applied Financial Economics, Vol. 10, No 3, pp.261-276.

Dominguez, K.M., Frankel, J.A. (1993), “Does foreign-exchange intervention matter? The portfolio effect”, The American Economic Review, Vol. 83, No 5, pp.1356-1369.

Dornbusch, R., Fischer, S. (1980), “Exchange rates and the current account”, The American Economic Review, Vol. 70, No 5, pp.960-971.

Fedorova, E., Saleem, K. (2010), “Volatility spillovers between stock and currency markets: Evidence from emerging Eastern Europe”, Czech Journal of Economics and Finance, Vol. 60, No 6, pp.519-531.

Fratzscher, M. (2002), “Financial market integration in Europe: on the effects of EMU on stock markets”, International Journal of Finance & Economics, Vol. 7, No 3, pp.165-193.

Gilmore, C.G., McManus, G.M. (2002), “International portfolio diversification: US and Central European equity markets”, Emerging Markets Review, Vol. 3, No 1, pp.69-83.

Granger, C.W., Huangb, B.N., Yang, C.W. (2000), “A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu”, The Quarterly Review of Economics and Finance, Vol. 40, No 3, pp.337-354.

Guo, F., Chen, C. R., & Huang, Y. S. (2011). Markets contagion during financial crisis: A regime-switching approach. International Review of Economics & Finance, 20(1), pp95-109.

Hardouvelis, G.A., Malliaropulos, D., Priestley, R. (2006), “EMU and European Stock Market Integration”, The Journal of Business, Vol. 79, No 1, pp.365-392.

Jochum, C., Kirchgässner, G., Platek, M. (1999), “A long-run relationship between Eastern European stock markets? Cointegration and the 1997/98 crisis in emerging markets”, Weltwirtschaftliches Archiv, Vol.135, No 3, pp.454-479.

Jorion, P. (1991), “The pricing of exchange rate risk in the stock market”, Journal of Financial and Quantitative Analysis, Vol. 26, No 3, pp.363-376.

Kanas, A. (2000), “Volatility spillovers between stock returns and exchange rate changes: international evidence”, Journal of Business Finance & Accounting, Vol. 27, No 3-4, pp.447-467.

Kim, S.J., Moshirian, F., Wu, E. (2005), “Dynamic stock market integration driven by the European Monetary Union: An empirical analysis”, Journal of Banking & Finance, Vol. 29, No 10, pp.2475-2502.

Lin, C.H. (2012), “The comovement between exchange rates and stock prices in the Asian emerging markets”, International Review of Economics & Finance, Vol. 22, No 1, pp.161-172.

Lupu, D., Asandului, M. (2014), “Exchange rate and trade: J-curve in European Union”, Acta Universitatis Danubius. OEconomica, Vol. 10, No 3, pp. 136-145.

Ma, C.K., Kao, G.W. (1990), “On exchange rate changes and stock price reactions”, Journal of Business Finance & Accounting, Vol. 17, No 3, pp.441-449.

Moore, T., Wang, P. (2007), “Volatility in stock returns for new EU member states: Markov regime switching model”, International Review of Financial Analysis, Vol.16, No 3, pp.282-292.

Pan, M.S., Fok, R.C. W., Liu, Y.A. (2007), “Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets”, International Review of Economics & Finance, Vol. 16, No 4, pp.503-520.

Pavlova, A., Rigobon, R. (2007), “Asset prices and exchange rates”, Review of Financial Studies, Vol. 20, No 4, pp.1140–1181.

Phylaktis, K., Ravazzolo, F. (2005), “Stock market linkages in emerging markets: implications for international portfolio diversification”, Journal of International Financial Markets, Institutions and Money, Vol. 15, No 2, pp.91-106.

Poshakwale, S., & Murinde, V. (2001). “Modelling the volatility in East European emerging stock markets: evidence on Hungary and Poland”. Applied Financial Economics, 11(4), pp.445-456.

Smyth, R., Nandha, M. (2003), “Bivariate causality between exchange rates and stock prices in South Asia”. Applied Economics Letters, Vol. 10, No 11, pp.699-704.

Stavarek, D. (2004), “Linkages between stock prices and exchange rates in the EU and the United States”, Economics Working Paper Archive, pp.1-36.

Syriopoulos, T. (2007), “Dynamic linkages between emerging European and developed stock markets: has the EMU any impact?”, International Review of Financial Analysis, Vol. 16, No 1, pp.41-60.

Voronkova, S. (2004), “Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes”, International Review of Financial Analysis, Vol. 13, No 5, pp.633-647.

Westermann, F. (2004), “Does the Euro affect the dynamic interactions of stock markets in Europe? Evidence from France, Germany and Italy”, The European Journal of Finance, Vol. 10, No 2, pp.139-148.