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Stock Prices and Exchange Rates in the EU and the United States: Evidence on their Mutual Interactions (in English)

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  • Daniel Stavárek

    () (Slesian University, Opava, Czech Republic)

Abstract

This paper investigates the nature of the causal relationships among stock prices and effective exchange rates in four old EU member countries (Austria, France, Germany, and the UK), four new EU member countries (Czech Republic, Hungary, Poland, and Slovakia), and in the United States. Both the long- and short-term causalities between these variables are explored using monthly data. The paper also endeavors to answer the question of whether the linkages between the analyzed economic variables are of similar intensity and direction in old and new EU member countries, and whether or how relationships have changed. The results show much stronger causality in countries with developed capital and foreign-exchange markets (i.e., old EU member countries and the United States). Evidence also suggests more powerful long- and short-term causal relations during the 1993–2003 period than during 1970–92. Causalities seem to be predominantly unidirectional, with the direction running from stock prices to exchange rates. Finally, we detected strong relations when applying the real effective exchange rate than the nominal effective exchange rate.

Suggested Citation

  • Daniel Stavárek, 2005. "Stock Prices and Exchange Rates in the EU and the United States: Evidence on their Mutual Interactions (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 141-161, March.
    • Handle: RePEc:fau:fauart:v:55:y:2005:i:3-4:p:141-161
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    File URL: http://journal.fsv.cuni.cz/storage/1013_s_141_161.pdf
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    References listed on IDEAS

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    1. Bala Ramasamy & Matthew C.H. Yeung, 2005. "The Causality Between Stock Returns And Exchange Rates: Revisited," Australian Economic Papers, Wiley Blackwell, vol. 44(2), pages 162-169, June.
    2. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-345, July.
    3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    4. Naeem Muhammad & Abdul Rasheed, 2002. "Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 535-550.
    5. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
    6. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
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    Cited by:

    1. Funda H. Sezgin & Nesli Nazik Özkan, 2015. "Effect Of Foreign Direct Investment On Balance Of Payment For Turkey: Econometric Analysis," Eurasian Eononometrics, Statistics and Emprical Economics Journal, Eurasian Academy Of Sciences, vol. 2(2), pages 55-75, October.
    2. repec:fis:journl:180105 is not listed on IDEAS
    3. Manish Kumar, 2009. "A Bivariate Linear and Nonlinear Causality between Stock Prices and Exchange Rates," Economics Bulletin, AccessEcon, vol. 29(4), pages 2884-2895.

    More about this item

    Keywords

    stock prices; cointegration; vector error-correction; exchange rates; Granger causality;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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