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Stock Prices and Exchange Rates in the EU and the USA: Evidence of their Mutual Interactions

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  • Stavarek, Daniel

Abstract

This paper investigates the nature of the causal relationships among stock prices and effective exchange rates in four old EU member countries (Austria, France, Germany, and the UK), four new EU member countries (Czech Republic, Hungary, Poland, and Slovakia), and in the United States. Both the long- and short-term causalities between these variables are explored using monthly data. The paper also endeavors to answer the question of whether the linkages between the analyzed economic variables are of similar intensity and direction in old and new EU member countries, and whether or how relationships have changed. The results show much stronger causality in countries with developed capital and foreign-exchange markets (i.e., old EU member countries and the United States). Evidence also suggests more powerful long- and short-term causal relations during the 1993-2003 period than during 1970-92. Causalities seem to be predominantly unidirectional, with the direction running from stock prices to exchange rates. Finally, we detected strong relations when applying the real effective exchange rate than the nominal effective exchange rate.

Suggested Citation

  • Stavarek, Daniel, 2004. "Stock Prices and Exchange Rates in the EU and the USA: Evidence of their Mutual Interactions," MPRA Paper 7297, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:7297
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    File URL: https://mpra.ub.uni-muenchen.de/7297/1/MPRA_paper_7297.pdf
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    References listed on IDEAS

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    Cited by:

    1. Paul Alagidede & Theodore Panagiotidis & Xu Zhang, 2011. "Causal relationship between stock prices and exchange rates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(1), pages 67-86.
    2. Abdullah M. Noman & Sarkar Humayun Kabir & Omar K.M.R. Bashar, 2012. "Causality between stock and foreign exchange markets in Bangladesh," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(3), pages 174-186, July.
    3. Enn Listra, 2013. "International Business Of Banking: The Pricing Example Of Retail Currency Spreads," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 1(1), pages 174-186, May.
    4. Mevlud Islami, 2008. "Interdependence Between Foreign Exchange Markets and Stock Markets in Selected European Countries," Schumpeter Discussion Papers sdp08007, Universit├Ątsbibliothek Wuppertal, University Library.
    5. Komain Jiranyakul, 2012. "Linkages between Thai stock and foreign exchange markets under the floating regime," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(4), pages 305-319, December.
    6. Aliyu, Shehu Usman Rano, 2009. "Stock Prices and Exchange Rate Interactions in Nigeria: An Intra-Global Financial Crisis Maiden Investigation," MPRA Paper 13283, University Library of Munich, Germany, revised 09 Feb 2009.
    7. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "Some thoughts on accurate characterization of stock market indexes trends in conditions of nonlinear capital flows during electronic trading at stock exchanges in global capital markets," MPRA Paper 49921, University Library of Munich, Germany.
    8. repec:spt:apfiba:v:7:y:2017:i:5:f:7_5_5 is not listed on IDEAS
    9. repec:ntu:ntugeo:vol1-iss1s-13-174 is not listed on IDEAS

    More about this item

    Keywords

    stock prices; exchange rates; cointegration; error correction model; Granger causality;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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