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Comparing the performance of relative stock return differential and real exchange rate in two financial crises

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  • Douglas Wong
  • Kui-Wai Li

Abstract

This article uses the Dynamic Conditional Correlation (DCC) model and the data from 11 economies to examine the inter-temporal interactions between stock return differential relative to the US and real exchange rate in the two financial crises of 1997 and 2008. The theoretical model suggests that relative stock return differential and real exchange rate that contain both permanent and temporary components are negatively correlated with each other. Evidence shows that sharp and rapid changes in conditional correlation occurred during the two financial crises. This study provides strong evidence in supporting the stochastic relationship between relative stock prices and real exchange rates, and exchange rate stability becomes crucial in a financial crisis.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100903266468
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 20 (2010)
Issue (Month): 1-2 ()
Pages: 137-150

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Handle: RePEc:taf:apfiec:v:20:y:2010:i:1-2:p:137-150

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Cited by:
  1. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2012. "The Japanese economy in crises: A time series segmentation study," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(5), pages 1-81.
  2. Caporale, Guglielmo Maria & Hunter, John & Menla Ali, Faek, 2014. "On the linkages between stock prices and exchange rates: Evidence from the banking crisis of 2007–2010," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 87-103.
  3. Kui-Wai Li, 2013. "The US monetary performance prior to the 2008 crisis," Applied Economics, Taylor & Francis Journals, vol. 45(24), pages 3450-3461, August.
  4. Li, Kui-Wai, 2011. "A study on the volatility forecast of the US housing market in the 2008 crisis," MPRA Paper 41033, University Library of Munich, Germany.
  5. Chortareas, Georgios & Cipollini, Andrea & Eissa, Mohamed Abdelaziz, 2012. "Switching to floating exchange rates, devaluations, and stock returns in MENA countries," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 119-127.
  6. Abdul Rashid & Mashael Bin Saedan, 2014. "Financial crisis and exchange rates in emerging economies: An empirical analysis using PPP-UIP-Framework," Business and Economic Horizons (BEH), Prague Development Center, vol. 9(4), pages 86-96, January.
  7. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2011. "The Japanese economy in crises: A time series segmentation study," Economics Discussion Papers 2011-24, Kiel Institute for the World Economy.

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