What Multiscale Approach Can Tell About the Nexus Between Exchange Rate and Stocks in the Major Emerging Markets?

Dejan Živkov (), Suzana Balaban () and Jasmina Djuraskovic ()
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Suzana Balaban: Faculty of Economics in Subotica, University of Novi Sad, Serbia
Jasmina Djuraskovic: The College of Tourism, University of Belgrade, Serbia

Czech Journal of Economics and Finance (Finance a uver), 2018, vol. 68, issue 5, 491-512

Abstract: This paper tries to answer which theory – the portfolio balance approach or the flow-oriented model, better explains the nexus between the national stock and exchange rate markets at different time-horizons in the major emerging markets of Europe and Asia. For that task we employ wavelet coherence and phase difference. Wavelet coherence results suggest that correlation between the two markets is not particularly strong throughout the observed period and at different wavelet scales, except in the period of World financial crisis (WFC). Phase difference in the Czech Republic, Turkey, Poland, Russia and South Korea are in anti-phase position during WFC in short run, which is in accordance with the portfolio-balance approach, whereby the stock market has the leading role. Also, phase difference at longer time-horizon indicate that an anti-phase situation is relatively common phenomenon in Poland, Russia, Turkey and South Korea. However, when we do calculations on real values, the results suggest that the real stock returns and the real exchange rate changes overwhelmingly behave in line with the flow-oriented model in all emerging markets, except for Poland. As for the Czech and Indian cases, phase differences indicate that the markets behave predominantly in accordance with the flow-oriented model at long-term horizon, regardless of whether nominal or real values are used.

Keywords: stock and exchange rate; emerging markets; wavelet coherence; phase difference (search for similar items in EconPapers)
JEL-codes: C15 F31 G15 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:68:y:2018:i:5:p:491-512

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