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Asymmetric Interaction between Stock Price Index and Exchange Rates: Empirical Evidence for Romania

Author

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  • Corina Saman

    () (Institute for Economic Forecasting, Romanian Academy.)

Abstract

This paper examines the interaction between the stock market and the foreign exchange market of Romania. This relationship has important implications from the viewpoint of the two economic theories - the traditional theory and the portfolio balance theory - and especially in the light of the increasing openness of the economy to international trade and investment. The data set, from March 2000 to March 2014, covers different market phases and stock market crashes, such as the recent global financial crisis and the Euro Area debt crisis. Due to the nonlinear nature of the relation between the variables, the study employs a threshold error-correction model based on two distinct regimes extended to incorporate asymmetries related to short-term good or bad news from the two markets. Within this framework, the empirical evidence shows that there is a long-run equilibrium between the two variables during the time period investigated. There are also short-run non-linear relationships sensitive to short-term good or bad news in the regime with fewer observations, called ‘extreme regime’.

Suggested Citation

  • Corina Saman, 2015. "Asymmetric Interaction between Stock Price Index and Exchange Rates: Empirical Evidence for Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 90-109, December.
  • Handle: RePEc:rjr:romjef:v::y:2015:i:4:p:90-109
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    References listed on IDEAS

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    1. repec:rjr:romjef:v::y:2019:i:2:p:98-116 is not listed on IDEAS
    2. Murad A. BEIN & Mehmet AGA, 2016. "On the Linkage between the International Crude Oil Price and Stock Markets: Evidence from the Nordic and Other European Oil Importing and Oil Exporting Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 115-134, December.

    More about this item

    Keywords

    exchange rates; stock prices; causality; non-linearity; asymmetric threshold model;

    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
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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