On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010

51 Pages Posted: 12 Apr 2013 Last revised: 3 Nov 2013

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University - Centre for Empirical Finance

John Hunter

Brunel University - School of Social Science

Faek Menla Ali

University of Sussex -University of Sussex Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2013

Abstract

This study examines the nature of the linkages between stock market prices and exchange rates in six advanced economies, namely the US, the UK, Canada, Japan, the euro area, and Switzerland, using data on the banking crisis between 2007 and 2010. Bivariate UEDCC-GARCH models are estimated producing evidence of unidirectional Granger causality from stock returns to exchange rate changes in the US and the UK, in the opposite direction in Canada, and bidirectional causality in the euro area and Switzerland. Furthermore, causality-in-variance from stock returns to exchange rate changes is found in the US and in the opposite direction in the euro area and Japan, whilst there is evidence of bidirectional feedback in Switzerland and Canada. The results of the time-varying correlations also show that the dependence between the two variables has increased during the recent financial crisis. These findings imply limited opportunities for investors to diversify their assets during this period.

Keywords: Stock prices, exchange rates, causality-in-variance, cointegration

JEL Classification: F31, G15, C32

Suggested Citation

Caporale, Guglielmo Maria and Hunter, John and Menla Ali, Faek, On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010 (April 1, 2013). DIW Berlin Discussion Paper No. 1289. Available at SSRN: https://ssrn.com/abstract=2248684 or http://dx.doi.org/10.2139/ssrn.2248684

Guglielmo Maria Caporale (Contact Author)

Brunel University - Centre for Empirical Finance ( email )

Uxbridge UB8 3PH
United Kingdom

John Hunter

Brunel University - School of Social Science ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom
00-44-1895-266648 (Phone)

HOME PAGE: http://www.brunel.ac.uk/about/acad//sss/depts/economics/ef_staff/johnhunter

Faek Menla Ali

University of Sussex -University of Sussex Business School ( email )

Falmer
Brighton, East Sussex BN1 9SL
United Kingdom

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