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Dynamic Relations between International Equity and Currency Markets: The Role of Currency Order Flow

Author

Listed:
  • Bill B. Francis

    (Rensselaer Polytechnic Institute)

  • Iftekhar Hasan

    (Rensselaer Polytechnic Institute)

  • Delroy M. Hunter

    (University of South Florida)

Abstract

Previous research on the dynamic linkages between international financial markets focused on bivariate interequity or intercurrency relationships and do not allow a specific role for the currency or equity market, respectively. In this paper, we hypothesize that there are important, yet not well understood, dynamic relationships between international equity and currency markets and these are driven by information spillover via the mechanism of currency order flow. Using a trivariate asymmetric GARCH framework, we find that the relationships between equity and currency markets are significant, bidirectional, and pervasive. These relationships, which coexist with the relationships between U.S. and foreign equity markets, are much stronger in the volatilities than in the means. Importantly, we find strong support for our information spillover hypothesis where currency order flow is the economic mechanism by which information is transmitted.

Suggested Citation

  • Bill B. Francis & Iftekhar Hasan & Delroy M. Hunter, 2006. "Dynamic Relations between International Equity and Currency Markets: The Role of Currency Order Flow," The Journal of Business, University of Chicago Press, vol. 79(1), pages 219-258, January.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:219-258
    DOI: 10.1086/497417
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    Citations

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    Cited by:

    1. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2010. "Private information, stock markets, and exchange rates," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 186-210, Bank for International Settlements.
    2. Betül Çal, 2015. "Reconciliation of Expectancy-Valence and Expectation-Disconfirmation Paradigms in Investment Decisions: Case of Turkish Equity Investors," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 5(1), pages 15-32, January.
    3. Gyntelberg, Jacob & Loretan, Mico & Subhanij, Tientip, 2018. "Private information, capital flows, and exchange rates," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 40-55.
    4. Michael Sager & Mark P. Taylor, 2008. "Commercially Available Order Flow Data and Exchange Rate Movements: Caveat Emptor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 583-625, June.
    5. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    6. Do, Hung Xuan & Brooks, Robert & Treepongkaruna, Sirimon & Wu, Eliza, 2014. "How does trading volume affect financial return distributions?," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 190-206.
    7. Yen-Hsien Lee & Hao Fang & Wei-Fan SU, 2014. "Effectiveness of Portfolio Diversification and the Dynamic Relationship between Stock and Currency Markets in the Emerging Eastern European and Russian Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(4), pages 296-311, September.
    8. Ojea Ferreiro, Javier, 2020. "Disentangling the role of the exchange rate in oil-related scenarios for the European stock market," Energy Economics, Elsevier, vol. 89(C).
    9. S. Narend & M. Thenmozhi, 2019. "Do Country ETFs Influence Foreign Stock Market Index? Evidence from India ETFs," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1_suppl), pages 59-86, April.
    10. Betül Çal, 2015. "Reconciliation of Expectancy-Valence and Expectation-Disconfirmation Paradigms in Investment Decisions: Case of Turkish Equity Investors," International Journal of Business and Social Research, LAR Center Press, vol. 5(1), pages 15-32, January.
    11. Ming†Chieh Wang & Feng†Ming Shih, 2013. "Time†Varying World and Regional Integration in Emerging European Equity Markets," European Financial Management, European Financial Management Association, vol. 19(4), pages 703-729, September.
    12. Rahmi Erdem Aktug, 2015. "Empirical dynamics of emerging financial markets during the global mortgage crisis," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 15(1), pages 17-36, March.
    13. Mohamed Abdelaziz Eissa & Georgios Chortareas & Andrea Cipollini, 2010. "Stock Returns and Exchange Rate Volatility Spillovers in the MENA Region," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(3), pages 257-284, December.
    14. 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.
    15. Laura Wallenius & Elena Fedorova & Sheraz Ahmed & Mikael Collan, . "Surprise Effect of Euro Area Macroeconomic Announcements on CIVETS Stock Markets," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-17.
    16. Khalil Jebran & Amjad Iqbal, 2016. "Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-20, December.
    17. Mohini GUPTA & Purwa SRIVASTAVA & Amritkant MISHRA & Malayaranjan SAHOO, 2021. "Time-varying volatility spillover of foreign exchange rate in three Asian markets: Based on DCC-GARCH approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(629), W), pages 105-120, Winter.
    18. Sukcharoen, Kunlapath & Zohrabyan, Tatevik & Leatham, David & Wu, Ximing, 2014. "Interdependence of oil prices and stock market indices: A copula approach," Energy Economics, Elsevier, vol. 44(C), pages 331-339.
    19. Du, Ding & Hu, Ou, 2014. "The long-run component of foreign exchange volatility and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 268-284.
    20. Laura Wallenius & Elena Fedorova & Sheraz Ahmed & Mikael Collan, 2017. "Surprise Effect of Euro Area Macroeconomic Announcements on CIVETS Stock Markets," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(1), pages 55-71.

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