Economic Integration and the Currency and Equity Markets Nexus
41 Pages Posted: 12 Aug 2019
Date Written: July 10, 2019
The paper examines the impact of economic integration on the relationship between the currency and equity markets for a group of Asian emerging economies using both linear and non- linear frameworks. We first derive the dynamic conditional correlations between the two markets and then examine the impact of economic integration on their relationship. Our main results are: (i) there is a negative correlation between real exchange rate changes and equity return differentials for all countries apart from China, which becomes deeper during the GFC for some of the countries; (ii) economic integration, both real and financial, has an asymmetric impact on the relationship between the two markets both in the short-run and in the long-run; and (iii) applying a linear framework does not bring out the impact of financial integration.
Keywords: economic integration, real exchange rate changes, stock return differentials, dynamic conditional correlations
JEL Classification: F31, G15
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