Prague Economic Papers 2016, 25(6):686-705 | DOI: 10.18267/j.pep.591

Dynamic Nexus between Exchange Rate and Stock Prices in the Major East European Economies

Dejan Živkov1, Jovan Njegić2, Vera Mirović3
1 Business School of Novi Sad, University Novi Sad, Serbia (dejanzivkov@gmail.com)
2 Business School of Novi Sad, University Novi Sad, Serbia (jovan.nj@gmail.com)
3 Faculty of Economics, Subotica, University of Novi Sad, Serbia (veramirovicns@gmail.com)

This paper investigates the dynamic conditional correlation (DCC) between stock returns and exchange rate in four East European emerging markets. Due to persistent long memory and the presence of the asymmetric effect in all asset markets we applied DCC-FIAPARCH model. The estimated negative DCC parameters in all scrutinized countries confirmed that portfolio-balanced theory has predominance in the short run in all selected economies. DCC parameters revealed significant time-varying behaviour, especially during the major crisis periods. By embedding dummy variables in the variance equations, we came to the conclusion that global shocks affect the volatility of DCCs. Particularly, it happened during the Global Financial Crisis and European sovereign debt crisis, but the effects were not linearly equal in all countries. Complementary rolling analysis unveils how conditional volatilities of analysed assets influence DCC. The results suggested that exchange rate conditional volatility has higher influence on DCC than stock conditional volatility.

Keywords: exchange rate, stocks, DCC-FIAPARCH, structural breaks, East European countries
JEL classification: C51, C58, F31, G12

Prepublished online: July 13, 2016; Published: December 1, 2016  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Živkov, D., Njegić, J., & Mirović, V. (2016). Dynamic Nexus between Exchange Rate and Stock Prices in the Major East European Economies. Prague Economic Papers, 25(6), 686-705. doi: 10.18267/j.pep.591
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Aloui, C. (2007). Price Volatility Spillovers between Exchange Rates and Stock Indexes for the Pre- and Post-Euro Period. Quantitative Finance, 7(6), 669-685. DOI: 10.1080/14697680701302653. Go to original source...
    2. Baele, L., Inghelbrecht, K. (2010). Time-Varying Integration Interdependence and Contagion. Journal of International Money and Finance, 29(5), 791-818. DOI: 10.1016/j.jimonfin.2009.12.008. Go to original source...
    3. Bai, J., Perron, P. (2003). Computation and Analysis of Multiple Structural Change Models. Journal of Applied Econometrics, 18(1), 1-22. DOI: 10.1002/jae.659. Go to original source...
    4. Baillie, R. T., Bollerslev, T., Mikkelsen, H. O. (1996). Fractionally Integrated Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 74(1), 3-30. DOI: 10.1016/s0304-4076(95)01749-6. Go to original source...
    5. Baillie, R. T., Han, Y. W., Myers, J. R., Song, J. (2007). Long Memory Models for Daily and High Frequency Commodity Futures Returns. The Journal of Futures Markets, 27(7), 643-668. DOI: 10.1002/fut.20267. Go to original source...
    6. Bartram, M. S., Bodnar, M. G. (2012). Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets. Journal of International Money and Finance, 31(4), 766-792. DOI: 10.1016/j.jimonfin.2012.01.011. Go to original source...
    7. Bentes, R. S., Menezes, R., Mendes, A. R. (2008). Long Memory and Volatility Clustering: Is the Empirical Evidence Consistent across Stock Markets? Physica A: Statistical Mechanics and its Applications, 387(15), 3826-3830. DOI: 10.1016/j.physa.2008.01.046. Go to original source...
    8. Billio, M., Caporin, M. (2010). Market Linkages, Variance Spillovers, and Correlation Stability: Empirical Evidence of Financial Contagion. Computational Statistics and Data Analysis, 54(11), 2443-2458. DOI: 10.1016/j.csda.2009.03.018. Go to original source...
    9. Boako, G., Omane-Adjepog, M., Frimpong, J. M. (2015). Stock Returns and Exchange Rate Nexus in Ghana: A Bayesian Quantile Regression Approach. South African Journal of Economics, 84(1), 149-179. DOI: 10.1111/saje.12096. Go to original source...
    10. Bollerslev, T., Wooldridge, J. M. (1992). Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariances. Econometric Reviews, 11(2), 143-172. DOI: 10.1080/07474939208800229. Go to original source...
    11. Caporale, G. M., Hunter, J., Ali, F. M. (2014). On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010. International Review of Financial Analysis, 33, 87-103. DOI: 10.1016/j.irfa.2013.12.005. Go to original source...
    12. Charfeddine, L., Ajmi, A. N. (2013). The Tunisian Stock Market Index Volatility: Long Memory vs. Switching Regime. Emerging Markets Review, 16, 170-182. DOI: 10.1016/j.ememar.2013.05.003. Go to original source...
    13. Chkili, W., Aloui, C., Nguyen, D. K. (2014). Instabilities in the Relationships and Hedging Strategies between Crude Oil and US Stock Markets: Do Long Memory and Asymmetry Matter? Journal of International Financial Markets, Institutions and Money, 33, 354-366. DOI: 10.1016/j.intfin.2014.09.003. Go to original source...
    14. Diamandis, P., Drakos, A. (2011). Financial Liberalization, Exchange Rates and Stock Prices: Exogenous Shocks in four Latin America Countries. Journal of Policy Modeling, 33(3), 381-394. DOI: 10.1016/j.jpolmod.2010.11.004. Go to original source...
    15. Dimitriou, D., Kenourgios, D. (2013). Financial Crises and Dynamic Linkage among International Currencies. Journal of International Financial Markets, Institutions and Money, 26, 319-332. DOI: 10.1016/j.intfin.2013.07.008. Go to original source...
    16. Durčáková, J. (2011). Foreign Exchange Rate Regimes and Foreign Exchange Markets in Transitive Economies. Prague Economic Papers, 20(4), 309-328. DOI: 10.18267/j.pep.402. Go to original source...
    17. Engle, R. F. (2002). Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models. Journal of Business and Economic Statistics, 20(3), 339-350. DOI: 10.1198/073500102288618487. Go to original source...
    18. Fang, W. S. (2002). The Effects of Currency Depreciation on Stock Returns: Evidence from Five East Asian Economies. Applied Economics Letters, 9(3), 195-199. DOI: 10.1080/13504850110054931. Go to original source...
    19. Fang, W. S., Miller, S. M. (2009). Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited. Japan and the World Economy, 21(3), 312-324. DOI: 10.1016/j.japwor.2008.10.002. Go to original source...
    20. Federal Reserve Board of St. Louis (2009). The Financial Crisis: A Timeline of Events and Policy Actions.
    21. Gil-Alana, L. A., Shittu, O. I., Yaya, S. O. (2014). On the Persistence and Volatility in European, American and Asian Stocks Bull and Bear Markets. Journal of International Money and Finance, 40, 149-162. DOI: 10.1016/j.jimonfin.2012.12.002. Go to original source...
    22. Goddard, J., Onali, E. (2012). Short and Long Memory in Stock Returns Data. Economics Letters, 117(1), 253-255. DOI: 10.1016/j.econlet.2012.05.016. Go to original source...
    23. Kanas, A. (2000). Volatility Spillovers between Stock Returns and Exchange Rate Changes: International Evidence. Journal of Business Finance and Accounting, 27(3-4), 448-467. DOI: 10.1111/1468-5957.00320. Go to original source...
    24. Liang, C. C., Lin, J. B., Hsu, H. C. (2013). Reexamining the Relationships between Stock Prices and Exchange Rates in ASEAN-5 Using Panel Granger Causality Approach. Economic Modeling, 32, 560-563. DOI: 10.1016/j.econmod.2013.03.001. Go to original source...
    25. Lin, C. H. (2012). The Comovement between Exchange Rates and Stock Prices in the Asian Emerging Markets. International Review of Economics and Finance, 22(1), 161-172. DOI: 10.1016/j.iref.2011.09.006. Go to original source...
    26. MacKinnon, J. G., White, H. (1985). Some Heteroskedasticity Consistent Covariance Matrix Estimators with Improved Finite Sample Properties. Journal of Econometrics, 29(3), 305-325. DOI: 10.1016/0304-4076(85)90158-7. Go to original source...
    27. Matsubayashi, Y. (2011). Exchange Rate, Expected Profit and Capital Stock Adjustment. Japanese Economic Review, 62(2), 215-247. DOI: 10.1111/j.1468-5876.2010.00516.x. Go to original source...
    28. Moore, T., Wang, P. (2014). Dynamic Linkage between Real Exchange Rates and Stock Prices: Evidence from Developed and Emerging Asian Markets. International Review of Economics and Finance, 29, 1-11. DOI: 10.1016/j.iref.2013.02.004. Go to original source...
    29. Phylaktis, K., Ravazzolo, F. (2005). Stock Prices and Exchange Rate Dynamics. Journal of International Money and Finance, 24(7), 1031-1053. DOI: 10.1016/j.jimonfin.2005.08.001. Go to original source...
    30. Robinson, P. M. (1995). Gaussian Semiparametric Estimation of Long Range Dependence. Annals of Statistics, 23(5), 1630-1661. DOI: 10.1214/aos/1176324317. Go to original source...
    31. Syllignakis, N. M., Kouretas P. G. (2011). Dynamic Correlation Analysis of Financial Contagion: Evidence from the Central and Eastern European Markets. International Review of Economics and Finance, 20(4), 717-732. DOI: 10.1016/j.iref.2011.01.006. Go to original source...
    32. Tai, C. S. (2007). Market Integration and Contagion: Evidence from Asian Emerging Stock and Foreign Exchange Markets. Emerging Markets Review, 8(4), 264-283. DOI: 10.1016/j.ememar.2006.09.011. Go to original source...
    33. Tsai, I. C. (2012). The Relationship between Stock Price Index and Exchange Rate in Asian Markets: A Quantile Regression Approach. Journal of International Financial Markets, Institutions and Money, 22, 609-621. Go to original source...
    34. Tsagkanos, A., Siriopoulos, C. (2013). A Long-Run Relationship between Stock Price Index and Exchange Rate: A Structural Nonparametric Cointegrating Regression Approach. Journal of International Financial Markets, Institutions and Money, 25, 106-118. DOI: 10.1016/j.intfin.2013.01.008. Go to original source...
    35. Tse, Y. K. (1998). The Conditional Heteroscedasticity of the Yen-Dollar Exchange Rate. Journal of Applied Econometrics, 13(1), 49-55. DOI: 10.1002/(sici)1099-1255(199801/02)13:13.3.co;2-f. Go to original source...
    36. Ulku, N., Demirci, E. (2012). Joint Dynamics of Foreign Exchange and Stock Markets in Emerging Europe. Journal of International Financial Markets, Institutions and Money, 22(1), 55-86. DOI: 10.1016/j.intfin.2011.07.005. Go to original source...
    37. Walid, C., Chaker, A., Masood, O., Fry, J. (2011). Stock Market Volatility and Exchange Rates in Emerging Countries: A Markov-State Switching Approach. Emerging Markets Review, 12(3), 272-292. DOI: 10.1016/j.ememar.2011.04.003. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content