Currency crises and the stock market: empirical evidence for another type of twin crisis

Stefan Eichler and Dominik Maltritz

Applied Economics, 2011, vol. 43, issue 29, 4561-4587

Abstract: We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1-2007Q4.

Date: 2011
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DOI: 10.1080/00036846.2010.491474

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