INTERDEPENDENCE BETWEEN STOCKS AND EXCHANGE RATE IN EAST ASIA — A WAVELET-BASED APPROACH

Dejan Živkov, Marko Peä†anac () and Dajana Ercegovac ()
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Dejan Živkov: Novi Sad School of Business, University of Novi Sad, Vladimira Perića Valtera 4, 21000 Novi Sad, Serbia
Marko Peä†anac: ��Andrićev venac 1, 11000 Belgrade, Serbia
Dajana Ercegovac: Novi Sad School of Business, University of Novi Sad, Vladimira Perića Valtera 4, 21000 Novi Sad, Serbia

The Singapore Economic Review (SER), 2023, vol. 68, issue 03, 917-939

Abstract: This paper investigates whether the portfolio-balance approach or the flow-oriented theory better explains the connection between stocks and exchange rate in various time-horizons in the four East Asian countries — Indonesia, Thailand, South Korea and Japan. For the analysis, we use different approaches of the wavelet methodology — wavelet correlation, wavelet coherence and wavelet cross-correlation. Wavelet correlations suggest that negative correlation is dominant across the wavelet scales in the emerging East Asian markets, which indicates that the portfolio-balance approach, that is, capital mobility stands behind this nexus. For the Japanese case, we find positive wavelet correlation across the scales, which suggests that the flow-oriented model or current account explains the interlink. Results of wavelet coherence are in line with the wavelet correlation results, and these results provide an additional evidence that investors’ panic during World financial crisis was the main culprit behind the massive financial fund reallocation in the all emerging Asian markets.

Keywords: Stock and exchange rate markets; wavelet-based methodologies; East Asian countries (search for similar items in EconPapers)
JEL-codes: C15 C32 F31 G15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0217590819500450

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