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Joint dynamics of foreign exchange and stock markets in emerging Europe

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  • Ülkü, Numan
  • Demirci, Ebru
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    Abstract

    This paper proposes an ideal specification for studying joint dynamics of emerging stock and foreign exchange markets, and applies it on European emerging markets where this interaction is of particular significance due to large external deficits. Results show that global developed and emerging stock market returns account for a large proportion of the (permanent) comovement between the stock index and currency value. The residual interaction after controlling for global indexes is small. The sign of the currency–stock market relationship is driven by dependence on foreign capital (predominantly positive for countries which are net receivers of foreign portfolio capital) and depth of the local stock market. Bank of Russia's intensive involvement in the currency market delays Ruble's response to global information. Emerging European currencies predict reversals in global equity indexes several months ahead.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 22 (2012)
    Issue (Month): 1 ()
    Pages: 55-86

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    Handle: RePEc:eee:intfin:v:22:y:2012:i:1:p:55-86

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Exchange rates; Stock market returns; European emerging markets; Cointegrating SVAR;

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    Cited by:
    1. Guglielmo Maria Caporale & John Hunter & Faek Menla Ali, 2013. "On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010," CESifo Working Paper Series 4189, CESifo Group Munich.
    2. Andreou, Elena & Matsi, Maria & Savvides, Andreas, 2013. "Stock and foreign exchange market linkages in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 248-268.
    3. Ülkü, Numan & Karpova, Yekaterina, 2014. "Do international equity investors rebalance to manage currency exposure? A study of Greece foreign investor flows data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 150-169.

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