Modelling stock price-exchange rate nexus in OECD countries - A new perspective

Afees Salisu and Umar Ndako

No 38, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: This paper subjects the Portfolio Balance Theory to empirical scrutiny using panel data of OECD countries. Thus, it examines the response of exchange rate to stock price changes contrary to the prominent practice in the literature where the former is hypothesized as the predictor. It also tests for the role of asymmetries in the nexus in response to the increasing evidence in the literature suggesting that most financial series tend to exhibit leverage effects. Given the significance of Euro currency in the OECD, we further partition the full data into Euro and Non-Euro areas. In addition, separate regressions are conducted for the pre- and post-Global Financial Crises (GFC) in order to account for the role of financial crisis in the nexus. For robustness, we consider both nominal and real variables and multiple data frequencies. In all, our findings validate the Portfolio Balance Theory for the full OECD, the Euro area, and the non-Euro area, albeit with lesser evidence for the latter. Also, the validity of the theory became more evident after the global financial crises while both long-run and short-run asymmetries are present in the nexus regardless of the data sample. Interestingly, our findings that give rise to this conclusion are robust to different data frequencies and variable measurements.

Keywords: OECD; stock price; exchange rate; portfolio balance theory; asymmetry; global financial crisis (search for similar items in EconPapers)
JEL-codes: C53 F31 G11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-12
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Modelling stock price–exchange rate nexus in OECD countries: A new perspective (2018)
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