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

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  • Bruce Morley

    (University of Bath)

Abstract

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.

Suggested Citation

  • Bruce Morley, 2009. "Exchange Rates and Stock Prices in the Long Run and Short Run," Department of Economics Working Papers 5/09, University of Bath, Department of Economics.
    • Handle: RePEc:eid:wpaper:15973
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    References listed on IDEAS

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    Cited by:

    1. Apergis, Nicholas & Zestos, George K. & Shaltayev, Dmitriy S., 2012. "Do market fundamentals determine the Dollar–Euro exchange rate?," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 1-15.
    2. Shada Almuwallad, 0000. "Exploring the Dynamics: Granger Causality Between Macroeconomic Variables and Sectoral Stock Prices Before and After the 2008 Financial Crisis: Evidence From The FTSE All-Share Index," Proceedings of Economics and Finance Conferences 14416316, International Institute of Social and Economic Sciences.

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    Keywords

    stock prices; forecast; cointegration; exchange rates;
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