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The relation between national stock prices and effective exchange rates: Does it affect exchange rate exposure?

Author

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  • Marko Korhonen

    (University of Oulu, Department of Economics)

Abstract

There is twofold contribution in this paper. First, by using monthly data for 8 industrialized countries for the period 1973-2011 we find evidence of time-varying cointegration relationship between effective exchange rates and national stock market indices. Second, we show that stock markets react differently on exchange rate changes depending on the connection between exchange rate and stock market. More specifically, we provide statistically significant evidence that the effect of the exchange rate exposure varies with the cointegration relation between stock and foreign exchange rate markets. This leads us to conclude that the exchange rate exposure is a time-varying non-linear process that follows exchange rate and stock market movements.

Suggested Citation

  • Marko Korhonen, 2014. "The relation between national stock prices and effective exchange rates: Does it affect exchange rate exposure?," Proceedings of International Academic Conferences 0201346, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:0201346
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    More about this item

    Keywords

    Exchange rate exposure; stock market returns; ARDL; cointegration; threshold;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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