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Joint dynamics of foreign exchange and stock markets in emerging Europe

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  • Ülkü, Numan
  • Demirci, Ebru

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.

Suggested Citation

  • Ülkü, Numan & Demirci, Ebru, 2012. "Joint dynamics of foreign exchange and stock markets in emerging Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 55-86.
    • Handle: RePEc:eee:intfin:v:22:y:2012:i:1:p:55-86
    DOI: 10.1016/j.intfin.2011.07.005
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    More about this item

    Keywords

    Exchange rates; Stock market returns; European emerging markets; Cointegrating SVAR;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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