The dynamics between the stock market and exchange rates: Spain 1999–2015

Despite the significance of the subprime crisis, there are few studies of its impact on the dynamics between stock markets and exchange rates in Eurozone countries. This study helps to remedy that shortage by analysing the dynamics between the stock market and exchange rates for the Spanish economy in the period 1999–2015 with sub-periods 1999–2007 and 2008–2015, both before and after the financial crisis. We analyse the Granger causality between the Spanish stock market and real effective exchange rates and EUR/USD, EUR/JPY, EUR/CNY and EUR/GBP bilateral rates, through the Toda and Yamamoto procedure. To check robustness and sign in the direction of causality we use impulse-response analysis. On the one hand, the results show that the relationships analysed are significant only in the crisis sub-period (2008–2015), in which bilateral exchange rates lead fluctuations in the stock market while the latter leads the real effective exchange rate. On the other hand, for bilateral exchange rates the directions that show the impulse-response analysis are consistent with those shown in the Granger-causality analysis and the sign coincides with the data on the merchandise trade balance with the countries in question.