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Comparing the performance of relative stock return differential and real exchange rate in two financial crises

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  • Douglas Wong
  • Kui-Wai Li

Abstract

This article uses the Dynamic Conditional Correlation (DCC) model and the data from 11 economies to examine the inter-temporal interactions between stock return differential relative to the US and real exchange rate in the two financial crises of 1997 and 2008. The theoretical model suggests that relative stock return differential and real exchange rate that contain both permanent and temporary components are negatively correlated with each other. Evidence shows that sharp and rapid changes in conditional correlation occurred during the two financial crises. This study provides strong evidence in supporting the stochastic relationship between relative stock prices and real exchange rates, and exchange rate stability becomes crucial in a financial crisis.

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  • Douglas Wong & Kui-Wai Li, 2010. "Comparing the performance of relative stock return differential and real exchange rate in two financial crises," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 137-150.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:1-2:p:137-150
    DOI: 10.1080/09603100903266468
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    Cited by:

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    3. Salisu, Afees A., 2019. "United we stand, divided we fall: A PANICCA test evidence for stock exchanges in OECD," Finance Research Letters, Elsevier, vol. 28(C), pages 343-347.
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    5. Caporale, Guglielmo Maria & Hunter, John & Menla Ali, Faek, 2014. "On the linkages between stock prices and exchange rates: Evidence from the banking crisis of 2007–2010," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 87-103.
    6. Afees A. Salisu & Juncal Cuñado & Kazeem Isah & Rangan Gupta, 2021. "Stock markets and exchange rate behavior of the BRICS," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(8), pages 1581-1595, December.
    7. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2011. "The Japanese economy in crises: A time series segmentation study," Economics Discussion Papers 2011-24, Kiel Institute for the World Economy (IfW Kiel).
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    13. Zhengde Xiong & Lijun Han, 2015. "Volatility spillover effect between financial markets: evidence since the reform of the RMB exchange rate mechanism," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-12, December.
    14. Hock Tsen Wong, 2016. "Real Exchange Rate Returns And Real Stock Price Returns In The Stock Market Of Malaysia," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1319-1349, December.
    15. Radhakrishnan, Srinivasan & Duvvuru, Arjun & Sultornsanee, Sivarit & Kamarthi, Sagar, 2016. "Phase synchronization based minimum spanning trees for analysis of financial time series with nonlinear correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 259-270.
    16. Máté Csiki & Gábor Dávid Kiss, 2018. "Capital Market Contagion in the Stock Markets of Visegrád Countries Based on the Heckman Selection Model," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 17(4), pages 23-52.
    17. Kiss, Gábor Dávid & Kosztopulosz, Andreász, 2012. "The impact of the crisis on the monetary autonomy of Central and Eastern European countries," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(1), pages 28-52.
    18. Xie, Zixiong & Chen, Shyh-Wei & Wu, An-Chi, 2020. "The foreign exchange and stock market nexus: New international evidence," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 240-266.
    19. Thiago Pires Santana & Nicole Horta & Catarina Revez & Rui Manuel Teixeira Santos Dias & Gilney Figueira Zebende, 2023. "Effects of Interdependence and Contagion on Crude Oil and Precious Metals According to ρ DCCA : A COVID-19 Case Study," Sustainability, MDPI, vol. 15(5), pages 1-12, February.
    20. Zhu, Huiming & Yu, Dongwei & Hau, Liya & Wu, Hao & Ye, Fangyu, 2022. "Time-frequency effect of crude oil and exchange rates on stock markets in BRICS countries: Evidence from wavelet quantile regression analysis," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    21. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2012. "The Japanese economy in crises: A time series segmentation study," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-81.
    22. Joseba Luzarraga-Goitia & Marta Regúlez-Castillo & Arturo Rodríguez-Castellanos, 2021. "The dynamics between the stock market and exchange rates: Spain 1999–2015," The European Journal of Finance, Taylor & Francis Journals, vol. 27(7), pages 655-678, May.
    23. Zhang, Yiting & Lee, Gladys Hui Ting & Wong, Jian Cheng & Kok, Jun Liang & Prusty, Manamohan & Cheong, Siew Ann, 2011. "Will the US economy recover in 2010? A minimal spanning tree study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(11), pages 2020-2050.

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