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Joint dynamics of foreign exchange and stock markets in emerging Europe

Numan Ülkü and Ebru Demirci

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 1, 55-86

Abstract: This paper proposes an ideal specification for studying joint dynamics of emerging stock and foreign exchange markets, and applies it on European emerging markets where this interaction is of particular significance due to large external deficits. Results show that global developed and emerging stock market returns account for a large proportion of the (permanent) comovement between the stock index and currency value. The residual interaction after controlling for global indexes is small. The sign of the currency–stock market relationship is driven by dependence on foreign capital (predominantly positive for countries which are net receivers of foreign portfolio capital) and depth of the local stock market. Bank of Russia's intensive involvement in the currency market delays Ruble's response to global information. Emerging European currencies predict reversals in global equity indexes several months ahead.

Keywords: Exchange rates; Stock market returns; European emerging markets; Cointegrating SVAR (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:1:p:55-86

DOI: 10.1016/j.intfin.2011.07.005

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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