Asymmetric Effect and Dynamic Relationships Between Stock Prices and Exchange Rates Volatility

Abstract

The analysis of time-varying correlation between stock prices and exchange rates in the context of international investments has been well researched in the literature in last few years. In this paper, we study the interdependence of exchange rates and stock prices for seven countries (Canada, Japan, Denmark, Hong Kong, Singapore, Mexico and Brazil). To do so, we both use the DCC-FIEGARCH and FIAPARCH-DCC models during the period spanning from January 1, 2000 until January 1, 2016. The empirical results suggest asymmetric responses in stock prices-exchange rates linkages, a high persistence of the conditional correlation. They also show bidirectional spillovers effects between different series. Moreover, the results indicate different behavior of exchange rates-stock prices nexus during the crisis periods, suggesting the need for specific policy measures. Finally, our findings offer investors, portfolios managers and policymakers insights on international portfolios and monetary.

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Fig. 1
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Notes

  1. 1.

    The use of such frequency allows to better analyze the statistical propriety of the long memory volatility. Weekly data do not permit to study the relationships between stock prices and exchange rates given that they do not take into account efficiently long memory while monthly data may be insufficient to track short-term developments.

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Correspondence to Wajdi Moussa.

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Appendices

Appendix 1

See Fig. 1 and 2.

Appendix 2

See Figs. 3, 4, 5, 6, 7, 8 and 9.

Fig. 3
figure3

Dynamic behavior of conditional correlation between exchange rate and index prices for Brazil

Fig. 4
figure4

Dynamic behavior of conditional correlation between exchange rate and index prices for Canada

Fig. 5
figure5

Dynamic behavior of conditional correlation between exchange rate and index prices for Singapore

Fig. 6
figure6

Dynamic behavior of conditional correlation between exchange rate and index prices for Japan

Fig. 7
figure7

Dynamic behavior of conditional correlation between exchange rate and index prices for Mexico

Fig. 8
figure8

Dynamic behavior of conditional correlation between exchange rate and index prices for Hong Kong

Fig. 9
figure9

Dynamic behavior of conditional correlation between exchange rate and index prices for Danemark

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Moussa, W., Bejaoui, A. & Mgadmi, N. Asymmetric Effect and Dynamic Relationships Between Stock Prices and Exchange Rates Volatility. Ann. Data. Sci. (2020). https://doi.org/10.1007/s40745-020-00295-9

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Keywords

  • Dynamic conditional correlation
  • Contagion effect
  • Asymmetries
  • Long memory