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Relationship between stock and currency markets conditional on the US stock returns: A vine copula approach

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  • Tachibana, Minoru

Abstract

Ignoring the co-movement of international stock markets might lead to a biased estimate for the relationship between domestic stock and currency markets. We address this issue by using US stock returns as a proxy for the movement of foreign stock markets and applying a vine copula approach to 21 economies over the period 2003–2017. We find that both stock and currency markets in these economies are highly correlated with the US stock market. As a result, taking no account of the international stock market co-movement leads to an upward bias in the estimate for the correlation between domestic stock and currency returns, although the bias is not of great magnitude. Finally, the estimate for the correlation between domestic stock and currency returns conditional on US stock returns tends to be positive in emerging economies but negative in developed economies.

Suggested Citation

  • Tachibana, Minoru, 2018. "Relationship between stock and currency markets conditional on the US stock returns: A vine copula approach," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 75-106.
  • Handle: RePEc:eee:mulfin:v:46:y:2018:i:c:p:75-106
    DOI: 10.1016/j.mulfin.2018.05.001
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    More about this item

    Keywords

    Vine copula; Stock return; Currency return;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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