STOCK PRICES AND EXCHANGE RATES IN AUSTRALIA: ARE COMMODITY PRICES THE MISSING LINK?

Nicolaas Groenewold and James Paterson
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Nicolaas Groenewold: UWA Business School, The University of Western Australia
James Paterson: UWA Business School, The University of Western Australia

No 11-07, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: The relationship between stock prices and exchange rates is an important topic of long standing. But there are still significant gaps in our knowledge of this area, not least, the ambiguity about the sign of the effect of a change in one of these variables on the other. While there are many possible reasons for this ambiguity, one which we explore in the Australian context in this paper is the omission of commodity prices. We show that a bivariate relationship which omits commodity prices performs badly but that once commodity prices are added to the relationship, our results are plausible and robust. We also throw light on the commodity-currency issue and show that the link from the exchange rate to commodity prices is stronger and more consistent than that in the opposite direction.

Pages: 26 pages
Date: 2011
New Economics Papers: this item is included in nep-cba and nep-fmk
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