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Financial crisis, exchange rate and stock market integration

  • Yushi Yoshida

    ()

    (Faculty of Economics, Kyushu Sangyo University)

After the financial crisis originating from the collapse of the US housing market in 2007, financial markets, including stock markets and foreign exchange markets, experienced drastic fluctuations during an adjustment stage. We examine how the financial crisis affected the linkage between foreign exchange markets and stock markets. First, by examining the daily stock market returns of both Japan and the United States for the sample covering the 2007-2008 financial crisis, we test whether there is a shift in correlation in a smooth-transition correlation GARCH model. We find strong evidence that there was an abrupt upward shift in correlation in June of 2001. There may have been another upward shift of correlation in June of 2008, although the evidence is statistically weak. Second, after adding the JPY/USD exchange rate into a model, we find little correlation between returns of exchange rate and the Japanese stock market, although evidence indicates that there is two-way causality effect between the exchange rate and the Japanese stock market in a VAR framework. This paper provides evidence that a large financial shock may bring financial markets around the world closer to one another.

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File URL: http://www.ip.kyusan-u.ac.jp/keizai-kiyo/dp38.pdf
File Function: First version, 2009Dec
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Paper provided by Kyushu Sangyo University, Faculty of Economics in its series Discussion Papers with number 38.

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Length: 28 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:kyu:dpaper:38
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  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2006. "Real-time price discovery in global stock, bond and foreign exchange markets," International Finance Discussion Papers 871, Board of Governors of the Federal Reserve System (U.S.).
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