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Exchange Rates and Stock Prices in the Long Run and Short Run

  • Morley, Bruce
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    Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results.

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    File URL: http://opus.bath.ac.uk/15973/1/0509.pdf
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    Paper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 15973.

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    Date of creation: 2009
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    Handle: RePEc:eid:wpaper:15973
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    1. Ehrmann, Michael & Fratzscher, Marcel & Rigobon, Roberto, 2005. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Working Paper Series 0452, European Central Bank.
    2. Bruce Morley, 2007. "The monetary model of the exchange rate and equities: an ARDL bounds testing approach," Applied Financial Economics, Taylor & Francis Journals, vol. 17(5), pages 391-397.
    3. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
    4. Smith, C. E., 1992. "Stock markets and the exchange rate: A multi-country approach," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 607-629.
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