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The Relationship Between Stock Prices and Exchange Rates: An Empirical Study on Emerging Markets


  • Erman Erbaykal
  • H. Aydin Okuyan


This study aims to determine whether the traditional or portfolio approach is relevant for developing countries, by using the relationship between stock prices and exchange rates. For this purpose, cointegration (Pesaran et al., 2001) and causality tests (Toda Yamamoto, 1995) are used to examine the relationship between stock prices and exchange rates using monthly data from 13 developing countries. There is a negative relationship between the variables in the long-run, in 6 countries. There is a casual relationship in 8 countries, for 5 countries there is uni-directional causality running from stock prices to exchange rate, for 3 countries there is bi-directional causality between the variables. These findings can be interpreted as the relevance of the portfolio approach in the developing countries examined

Suggested Citation

  • Erman Erbaykal & H. Aydin Okuyan, 2007. "The Relationship Between Stock Prices and Exchange Rates: An Empirical Study on Emerging Markets," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 1(1), pages 77-90.
  • Handle: RePEc:bdd:journl:v:1:y:2007:i:1:p:77-90

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    References listed on IDEAS

    1. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
    2. Joe Peek & Eric S. Rosengren, 1995. "Bank lending and the transmission of monetary policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 39, pages 47-79.
    3. Altunbas, Yener & Fazylov, Otabek & Molyneux, Philip, 2002. "Evidence on the bank lending channel in Europe," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2093-2110, November.
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    More about this item


    Exchange Rates; Stock Prices; Bounds Test; Toda Yamamoto Causality;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes


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