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Dynamic correlation between stock prices and exchange rates

Author

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  • Chia-Hao Lee
  • Shuh-Chyi Doong
  • Pei-I Chou

Abstract

This article examined the interaction between stock price and exchange rate and explored their dynamic correlation influenced by the stock market volatility. We used newly developed Smooth Transition Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity (STCC-GARCH) model and applied weekly data from Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand for the period 2000 to 2008 to test the dynamic correlation hypothesis. The empirical results indicated that there are significant price spillovers from stock market to foreign exchange market for Indonesia, Korea, Malaysia, Thailand and Taiwan. Furthermore, the correlation between stock and foreign exchange markets becomes higher when stock market volatility increases in Asian emerging markets except in the Philippines. These results are important for international investors and managers to devise hedging and diversification strategies for their portfolios. The evidence suggests that investors can hedge risk between stock and foreign exchange in domestic markets when the stock market is stable. Otherwise, when the stock market becomes volatile, investors diversify their portfolio internationally for hedging risk since the correlation between stock and foreign exchange markets becomes higher.

Suggested Citation

  • Chia-Hao Lee & Shuh-Chyi Doong & Pei-I Chou, 2011. "Dynamic correlation between stock prices and exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 21(11), pages 789-800.
  • Handle: RePEc:taf:apfiec:v:21:y:2011:i:11:p:789-800
    DOI: 10.1080/09603107.2010.537631
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    References listed on IDEAS

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    Cited by:

    1. Sensoy, Ahmet & Sobaci, Cihat, 2014. "Effects of volatility shocks on the dynamic linkages between exchange rate, interest rate and the stock market: The case of Turkey," Economic Modelling, Elsevier, vol. 43(C), pages 448-457.
    2. De Santis, Roberto A. & Stein, Michael, 2016. "Correlation changes between the risk-free rate and sovereign yields of euro area countries," Working Paper Series 1979, European Central Bank.
    3. Yu Hsing, 2011. "The Stock Market and Macroeconomic Variables in a BRICS Country and Policy Implications," International Journal of Economics and Financial Issues, Econjournals, vol. 1(1), pages 12-18.
    4. Yu Hsing, 2015. "Short-Run Determinants of the USD/MYR Exchange Rate," Economics Bulletin, AccessEcon, vol. 35(1), pages 97-105.
    5. Walid M. A. Ahmed, 2014. "Dynamic interactions between Egyptian equity and currency markets prior to and during political unrest," Applied Financial Economics, Taylor & Francis Journals, vol. 24(20), pages 1347-1359, October.
    6. Jing Nie & Zhichao Zhang & Zhuang Zhang & Si Zhou, 2015. "Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 23(3), pages 97-109, May.
    7. De Santis, Roberto A. & Stein, Michael, 2015. "Financial indicators signaling correlation changes in sovereign bond markets," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 86-102.
    8. repec:agr:journl:v:2(602):y:2015:i:2(602):p:247-254 is not listed on IDEAS
    9. Dirk G Baur & Isaac Miyakawa, 2013. "International Investors, Exchange Rates and Equity Prices," Working Paper Series 178, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    10. De Santis, Roberto A. & Stein, Michael, 2014. "Financial indicators signalling correlation changes in sovereign bond markets," Working Paper Series 1746, European Central Bank.
    11. Chia-Hao Lee & Pei-I Chou, 2012. "Trading Activity and Financial Market Integration," The Financial Review, Eastern Finance Association, vol. 47(3), pages 589-616, August.
    12. Yu HSING, 2015. "Short-run determinants of the USD/PLN exchange rate and policy implications," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(603), S), pages 247-254, Summer.
    13. repec:spr:jecfin:v:42:y:2018:i:1:d:10.1007_s12197-017-9388-8 is not listed on IDEAS

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