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Do foreign exchange and equity markets co-move in Latin American region? Detrended cross-correlation approach

Listed author(s):
  • Bashir, Usman
  • Yu, Yugang
  • Hussain, Muntazir
  • Zebende, Gilney F.
Registered author(s):

    This paper investigates the dynamics of the relationship between foreign exchange markets and stock markets through time varying co-movements. In this sense, we analyzed the time series monthly of Latin American countries for the period from 1991 to 2015. Furthermore, we apply Granger causality to verify the direction of causality between foreign exchange and stock market and detrended cross-correlation approach (ρDCCA) for any co-movements at different time scales. Our empirical results suggest a positive cross correlation between exchange rate and stock price for all Latin American countries. The findings reveal two clear patterns of correlation. First, Brazil and Argentina have positive correlation in both short and long time frames. Second, the remaining countries are negatively correlated in shorter time scale, gradually moving to positive. This paper contributes to the field in three ways. First, we verified the co-movements of exchange rate and stock prices that were rarely discussed in previous empirical studies. Second, ρDCCA coefficient is a robust and powerful methodology to measure the cross correlation when dealing with non stationarity of time series. Third, most of the studies employed one or two time scales using co-integration and vector autoregressive approaches. Not much is known about the co-movements at varying time scales between foreign exchange and stock markets. ρDCCA coefficient facilitates the understanding of its explanatory depth.

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    File URL: http://www.sciencedirect.com/science/article/pii/S037843711630365X
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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 462 (2016)
    Issue (Month): C ()
    Pages: 889-897

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    Handle: RePEc:eee:phsmap:v:462:y:2016:i:c:p:889-897
    DOI: 10.1016/j.physa.2016.06.090
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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