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

  • Stavarek, Daniel

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7297.

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Date of creation: 2004
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Publication status: Published in Finance a úvěr - Czech Journal of Economics and Finance 3-4.55(2005): pp. 141-161
Handle: RePEc:pra:mprapa:7297
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  1. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
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  8. Griffin, John M & Stulz, Rene M, 2001. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 215-41.
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  14. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-49, March.
  15. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
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