THE DYNAMIC RELATIONSHIP BETWEEN STOCK PRICES AND EXCHANGE RATES: EVIDENCE FOR BRAZIL

Benjamin Miranda Tabak ()

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 08, pages 1377-1396

Abstract: This paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors and in the design of exchange rate policies.

Keywords: Stock prices; exchange rates; bivariate causality; nonlinear causality (search for similar items in EconPapers)
Date: 2006

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Working Paper: The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil (2006)
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