Linkages between Stock Prices and Exchange Rates in the EU and the United States

Daniel Stavarek

Finance from University Library of Munich, Germany

Abstract: This paper investigates the nature of the causal relationship between stock prices and effective exchange rates in four old EU-member countries (Austria, France, Germany, and the UK), four new EU-member countries (Czech Republic, Hungary, Poland, and Slovakia) and in the USA. Both the long-run and short run causalities between these variables are explored using monthly data. The paper also tries to answer the question whether the linkages between analyzed economic variables are of the similar intensity and direction in the old and new part of the EU and how has been the relationship changing over the analyzed period. The results show much stronger causality in countries with developed capital and foreign exchange markets (old EU-member countries and the USA) than in the new-comes. Evidence also suggests more powerful long-run as well as short-run causal relations in the period 1993-2003 than during 1970- 1992. Causalities seem to be predominantly unidirectional with a direction running from stock prices to exchange rates. Finally, we also detected the real effective exchange rate as a more suitable variable than nominal effective exchange rate for such kind of analysis.

Keywords: stock prices; exchange rate; cointegration; Granger causality (search for similar items in EconPapers)
JEL-codes: C32 G15 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-06-15
New Economics Papers: this item is included in nep-cfn, nep-eec and nep-ifn
Note: Type of Document - pdf; pages: 32
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0406006

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