Abstract
The nexus between stock markets and exchange rates is examined in the case of eight European countries. The sample consists of four economies with national currencies and four that have adopted the euro. Thus, if differences between the two groups in the relationship governing the two markets exist, they will be unveiled. To this effect, a threshold cointegration methodology is adopted that allows for more reliable inferences to be drawn for both the short and long run nexus between the two markets. Monthly data is used covering the period 01/2000–12/2014. The findings reported herein offer support in favor of the portfolio approach thesis over the recent economic crisis period, but this finding is not the case for the entire sample. Bidirectional causality is found for Norway and the UK, pointing to a currency effect on stock markets. In view of the findings reported herein, policies aiming at reducing uncertainty in the stock markets can exert beneficial effects on currency markets.
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Notes
Specifically the following indices are investigated here: DAX, CAC40, FTSE MIB Index, FTSE 100, Københavns Fondsbørs Indeks, Oslo Bors All-Share Index, OMX Stockholm 30 Index, Association of Spanish Stock Exchanges Index.
Moreover, by using a bivariate VAR model, the multivariate AIC selected a model using two or three lagged changes of the series in most of the cases. The Johansen (1996) procedure was not able to detect a long-run equilibrium relationship between these two series at conventional significance levels. These results are not presented here for reasons of brevity.
We refer to consistent TAR and M-TAR models with the acronyms TART and M-TART.
F-statistics are higher than the critical values, at the 5 % significance level as reported by Enders and Siklos (2001).
We have to mention at that point that in cases where problems of heteroskedasticity are presented we used Newey-West constistent estimators.
The findings are not reported for economy of space reasons.
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Kollias, C., Papadamou, S. & Siriopoulos, C. Stock markets and effective exchange rates in European countries: threshold cointegration findings. Eurasian Econ Rev 6, 215–274 (2016). https://doi.org/10.1007/s40822-015-0040-7
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DOI: https://doi.org/10.1007/s40822-015-0040-7