Economic Integration and the Currency and Equity Markets Nexus

41 Pages Posted: 12 Aug 2019

See all articles by Muhammad Aftab

Muhammad Aftab

COMSATS University Islamabad

Rubi Ahmad

Department of Finance and Banking, University of Malaya

Izlin Ismail

University of Malaya

Kate Phylaktis

City University London - Sir John Cass Business School

Date Written: July 10, 2019

Abstract

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

Suggested Citation

Aftab, Muhammad and Ahmad, Rubi and Ismail, Izlin and Phylaktis, Kate, Economic Integration and the Currency and Equity Markets Nexus (July 10, 2019). Available at SSRN: https://ssrn.com/abstract=3434379 or http://dx.doi.org/10.2139/ssrn.3434379

Muhammad Aftab

COMSATS University Islamabad ( email )

Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan

Rubi Ahmad

Department of Finance and Banking, University of Malaya ( email )

Kuala Lumpur, Wilayah Persekutuan 50603
University of Malaya (UM)
Kuala Lumpur, Wilayah Persekutuan 50603
Malaysia

Izlin Ismail

University of Malaya ( email )

Jalan Lembah Pantai
Kuala Lumpur, Wilayah Persekutuan 50603
Malaysia

Kate Phylaktis (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

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