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Dynamic relationship between exchange rates and stock prices for the G7 countries: A nonlinear ARDL approach

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  • Nusair, Salah A.
  • Olson, Dennis

Abstract

This paper employs linear and nonlinear ARDL models to examine the short-run and long-run relationship between stock prices and exchange rates in the G7 countries. Both the flow-oriented approach that exchange rates affect stock prices and the portfolio balance approach that stock prices affect exchange rates are supported in the short-run. Neither model is supported in the long-run using linear ARDL models, but the nonlinear ARDL model shows evidence supporting the portfolio balance approach in four of the countries. In these four countries we find that rising and falling stock prices have significant long-run effects on their exchange rates. Furthermore, Granger causality tests confirm that causality runs from stock prices to exchange rates in six of the countries. Thus, the use of a longer and more recent data set provides stronger long-run support for the portfolio balance approach than found in most of the recent literature, while we confirm results of recent research showing no long-run evidence of causation running from exchange rates to stock prices.

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  • Nusair, Salah A. & Olson, Dennis, 2022. "Dynamic relationship between exchange rates and stock prices for the G7 countries: A nonlinear ARDL approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:intfin:v:78:y:2022:i:c:s1042443122000312
    DOI: 10.1016/j.intfin.2022.101541
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    2. Bhaskar Bagchi & Biswajit Paul, 2023. "Effects of Crude Oil Price Shocks on Stock Markets and Currency Exchange Rates in the Context of Russia-Ukraine Conflict: Evidence from G7 Countries," JRFM, MDPI, vol. 16(2), pages 1-18, January.
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    5. Olajide O. Oyadeyi & Sodiq Arogundade & Mduduzi Biyase, 2024. "How did African stock markets react to the Russia-Ukraine crisis “black-swan” event? Empirical insights from event study," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-13, December.
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    7. Chortane, Sana Gaied & Pandey, Dharen Kumar, 2022. "Does the Russia-Ukraine war lead to currency asymmetries? A US dollar tale," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    8. Wei Guo & Zhongfei Chen, 2023. "China–US economic and trade relations, trade news, and short‐term fluctuation of the RMB exchange rate," Review of International Economics, Wiley Blackwell, vol. 31(1), pages 180-203, February.
    9. Wang, Lu & Ruan, Hang & Hong, Yanran & Luo, Keyu, 2023. "Detecting the hidden asymmetric relationship between crude oil and the US dollar: A novel neural Granger causality method," Research in International Business and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Exchange rates; Stock prices; Asymmetry; Nonlinear ARDL model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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