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The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil

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  • Benjamin M. Tabak

Abstract

This paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long-run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors

Suggested Citation

  • Benjamin M. Tabak, 2006. "The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil," Working Papers Series 124, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:124
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    References listed on IDEAS

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    2. repec:agr:journl:v:xxiv:y:2017:i:2(611):p:33-44 is not listed on IDEAS
    3. repec:taf:rjapxx:v:15:y:2010:i:4:p:490-508 is not listed on IDEAS
    4. Juan Carlos Cuestas & Bo Tang, 2015. "Exchange Rate Changes and Stock Returns in China: A Markov Switching SVAR Approach," Working Papers 2015024, The University of Sheffield, Department of Economics.
    5. repec:hur:ijaraf:v:7:y:2017:i:3:p:70-86 is not listed on IDEAS
    6. repec:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9472-x is not listed on IDEAS
    7. Bashir, Usman & Yu, Yugang & Hussain, Muntazir & Zebende, Gilney F., 2016. "Do foreign exchange and equity markets co-move in Latin American region? Detrended cross-correlation approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 889-897.
    8. Kal, Süleyman Hilmi & Arslaner, Ferhat & Arslaner, Nuran, 2015. "The dynamic relationship between stock, bond and foreign exchange markets," Economic Systems, Elsevier, vol. 39(4), pages 592-607.
    9. Yang, Liansheng & Zhu, Yingming & Wang, Yudong & Wang, Yiqi, 2016. "Multifractal detrended cross-correlations between crude oil market and Chinese ten sector stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 255-265.
    10. Phiri, Andrew, 2018. "Structural changes in exchange rate-stock returns dynamics in South Africa: Examining the role of crisis and new trading platform," MPRA Paper 85826, University Library of Munich, Germany.
    11. repec:bpj:jossai:v:5:y:2017:i:1:p:1-20:n:1 is not listed on IDEAS
    12. Erick Lusekelo Mwambuli & Zhang Xianzhi & Zakayo S. Kisava, 2016. "Volatility Spillover Effects Between Stock Prices and Exchange Rates in Emerging Economies: Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 343-359, December.
    13. repec:fis:journl:180105 is not listed on IDEAS

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