Analysis on the Relationship between the Evolution of Stock Prices

and Exchange Rates in Emerging Markets

- Case of Romania -

Author: Ionescu Liviu Iulian

Scientific coordinator: Prof. Alexandra Horobeţ PhD.

1. Introduction

Twenty years ago, "emerging markets" was the label for countries that were just
starting to interest a broader class of investors worldwide. These countries were perceived as
having strong (but unrealized) prospects while being somewhat peripheral to the main
functioning of the global economy. Ten years ago, many of these emerging markets faced
major crises. They had clearly become big enough to shake the financial world, at least in
some disturbing moments in 1997–98. The label "emerging markets" meant instability, or at
least some form of volatility.

Today, emerging markets have become quite a major determinant of global prosperity.
Over the past five years, these countries have accounted, according to the International
Monetary Fund, for between one-quarter and one-half of global growth (depending on how it
is measured). Not only did capital flows to emerging markets increase dramatically, but their
composition changed substantially as well. Portfolio flows (fixed income and equity) and
foreign direct investment replaced commercial bank debt as the dominant sources of foreign
capital. This could not have happened without these countries embarking on a financial
liberalization process, relaxing restrictions on foreign ownership of assets, and taking other
measures to develop their capital markets, often in tandem with macroeconomic and trade
reforms. They have also fought the recent global financial disturbance well and, through
growing financial and trade linkages, have helped keep advanced economies from slowing
down. Also, the way emerging markets have handled the inflation challenges will have
profound effects on growth and inflation around the world.
 Developing economies in the Central and Eastern Europe have faced massive input of
direct foreign investments, either independent to, or associated with the privatization regime
or stimulated by the significant interest spread in comparison to the developed countries.
Massive inputs of capital have created a dilemma for monetary authorities. On one
hand, these stimulate the development of the economy, thus supporting the real convergence;
on the other hand they contribute to short term reduction of inflationary pressures through the
effects they have on the appreciation of the exchange rate and by guiding the consumption
towards marketable goods.

On the other hand, due to the same effects on the appreciation of the exchange rate,
capital incomes can erode the external competitiveness of the market, thus amplifying
external imbalances, which leads to the depreciation of the currency and eventually higher
inflation. Moreover, high external imbalances increase the vulnerability of the economy to the
investors’ modifying perceptions or to the shocks associated with high volatility on external
markets.

2. Theoretical background

From an emerging market perspective, investigation of the relationship between stock

prices and exchange rate is interesting for a number of reasons.

First, in an era of growing trade and financial liberalization, emerging economies are
now more subject to the fluctuations in exchange rate at the micro and the macro level. The
analysis of this exposure is also meaningful as most of the developing countries are shifting
from various forms of pegged arrangements towards a floating exchange rate system, while
trying to develop their stock markets (Abdalla and Murinde, 1997) and to establish their
monetary politics. Targeting the exchange rate, along with inflation targeting, has recently
become a strategic tool in monetary politics. Small economies tend to prefer pegged exchange
rates. Such examples are Monetary Council in Bulgaria, Estonia and Lithuania or hard peg in
Latvia. Other countries have chosen for more flexible exchange regimes, like free floating in
Poland, managed floating in the Czech Republic and Romania and an ERM II fluctuation
band of the exchange rate in Hungary.

Second, emerging stock markets become very vulnerable to the contagious effects in
parallel to rapid integration of world financial markets. For example, most of the equity
markets around world quickly reacted to the recent financial crisis. Therefore the relationship
between stock prices and exchange rates provides another potential avenue for research in
spillover effects (Granger, Huang and Yang, 2000). Moreover, such an inquiry of a statistical
relation among these variables is of an utmost importance from the perspective of arbitrage
seekers as well.

The discovery of a causal relationship in foreign exchange and stock exchange

markets is of great importance. By causal relationship we are referring to the situation in
which the movement of one market precedes the movement of the other. In particular,
researchers refer to the phenomena whereby changes in the exchange rates followed by
changes in stock prices as exchange rates Granger-cause stock prices. Similarly, stock prices
Granger-cause exchange rates would mean changes in the former occur before the latter.

Demonstrating the fact that there is a connection between stock prices and exchange
rate is important for a number of reasons.

It is widely known that policy-makers sustain less expensive money in order to boost
the exports. However, it is rarely taken into account the fact that such a measure can have an
opposite effect on the stock market and might depress it. Companies that do not use their
products for export can be affected by the appreciation of the foreign currency, can have
problems returning the loans they signed with the bank, can postpone their investment plans,
etc. In fighting this problem, all the companies, but especially multinational corporations, can
manage their exposure to foreign payments and exchange rate risk and can stabilize their
earnings by studying this relationship between the exchange and stock market. Furthermore
supposing we know in an economy that exchange rates Granger-cause the stock prices,
policy-makers may fortify the economy’s stock market by enhancing her exchange rate
market conditions, for instance, reducing excessive fluctuations of exchange rates or applying
favorable exchange rate policy. The other way around, if stock prices are known to Granger-
cause exchange rates, then exchange rate conditions may be strengthen by improving the
stock market’s fundamentals.

Secondly, in emerging economies, such as Romania, which emancipated from

communism not too long ago and which during that time had no banking history and
experience, the currency can be a very important asset in the portfolio of foreign investors. All
kind of funds are bringing money in the country in order to take advantage of the fast-growing
economy, the fast-growing capital market and the local currency. The performance of the fund
can be influenced, and hence better observed, by the link between currency rates and other
assets in a portfolio.

Thirdly, becoming aware and understanding the relationship between the exchange
rate and the stock market can be helpful in anticipating a crisis.

Existing literature suggests that the theoretical foundations of the linkages between
exchange rate and stock prices are microeconomic as well as macroeconomic.

At the micro level, exchange rate changes influence the value of a portfolio of
domestic and multinational firms. From the traditional point of view, the appreciation
(depreciation) of a local currency has two major implications. Firstly, it increases (decreases)
indebtedness in term of foreign denomination currency. In other words, companies in local
country have to pay more (less) for the foreign denominated debt and ultimately companies’
cash flows deteriorates (improves). Secondly, an increase (decrease) in production costs,
especially in those developing economies which productions rely heavily on imported raw
materials. The consequences are twofold; loss (gain) in price competitiveness and the
companies’ revenues.

At a macro level, there are my factors which have an impact on the daily stock prices,
such as stock prices of other countries, the performance of the Gross Domestic Product,
exchange rates, interest rates, current account, money supply, unemployment, etc. However,
the relationship between stock prices and exchange rates depends greatly also on the exchange
rate regime in force. Economic theory suggests that, under a floating exchange rate regime,
exchange rate appreciation reduces the competiveness of export markets; it therefore has a
negative effect on the domestic stock market. On the other hand, for an import dominated
country, exchange rate appreciation lowers input costs and generates a positive impact on the
stock market.

In the recent years, because of increasing international diversification, cross-market

return correlations, gradual abolishment of capital inflow barriers and foreign exchange
restrictions or the adoption of more flexible exchange rate arrangements in emerging and
transition countries, these two markets have become interdependent. These changes have
increased the variety of investment opportunities as well as the volatility of exchange rates
and risk of investment decisions and portfolio diversification process. Thus, understanding
this relationship will help domestic as well as international investors for hedging and
diversifying their portfolio.

3. Previous research

This is why a considerable amount of research has been dedicated to studying this
connection between stock prices and exchange rates. This research uses advanced
econometric models to analyze the relationship between these variables, such as bivariate and
multivariate cointegration methods, Granger causality tests and GARCH models. The
countries and regions analyzed are diverse, however no definite conclusion can be drawn
from them. Ultimately it depends on the specific of the country and the region it belongs.
Hussein and Liew (2004) analyzed Malaysia and Thailand during the 1997 Asian
crisis. The two have demonstrated in their research that there is a causal feedback relationship
between these two markets in Malaysia. In the case of Thailand it was found a unidirectional
causality from stock prices to exchange rates. A strong link between the markets of two Asian
countries was found, which explains the crisis that affected at the beginning Thailand and then
Malaysia.

The Gulf countries were analyzed through several works. Tahir and Ghani discovered
a long-run bi-directional causal relationship between stock prices and exchange rates (British
Pond & Japanese Yen) and only uni-directional, from stock prices to exchange rate, causal
relationship between them.

Gunduz and Abdulnasser (2004) investigate the causality between the exchange rates
and stock prices in the Middle East and North Africa region before and after the Asian
financial crisis and they find uni-directional Granger causality from exchange rates to stock
prices for Israel and Morocco before and after the crisis, and for Jordan after the crisis.
Additionally, no relationship is identified between the two variables for Egypt.

The stock prices and exchange rates in Turkey have been subject of study for Aydemir
and Demirhan.

Another interesting research was developed by Murinde and Poshakwale (2004) that
investigate price interactions between the foreign exchange market and the stock market in a
number of three European emerging financial markets – Hungary, Poland and Czech Republic
– before and after the adoption of the euro. Using daily observations on both stock prices and
exchange rates, they find that for the pre-euro period stock prices in these countries uni-
directionally Granger cause exchange rates only in Hungary, while bi-directional causality
relations exist in Poland and Czech Republic. After the euro adoption, exchange rates uni-
directionally Granger-cause stock prices in all three countries. The authors interpret these
results as being consistent with the dynamic nature of the transition process, suggesting that
causality is much easier to detect as the markets become more integrated with the EU.

Pacific Basin countries were studied by Phylaktis and Ravazollo (2005), which
examine the long-run and short-run dynamics between stock prices and exchange rates and
the channels through which exogeneous shocks impact on these markets by using
cointegration methodology and multivariate Granger causality tests. For the period 1980-
1998, their results suggest that these markets are positively related and that the US market
acts as a leading factor for these links. Moreover, the links between the stock prices and
exchange rates were found to be determined by foreign exchange restrictions.

The dynamic relationship between the two markets is also studied in the Brazilian
economy by Tabak (2006). It was found that there is no long-run relationship, but there is
linear Granger causality from stock prices to exchange rates, in line with the portfolio
approach: stock prices lead exchange rates with a negative correlation. Furthermore, the
author found evidence of nonlinear Granger causality from exchange rates to stock prices, in
line with the traditional approach: exchange rates lead stock prices.
The present analysis uses two sets of data between the dates of January 1999 and
December 2008: on one hand, the bilateral exchange rate of the Romanian Leu (RON) against
the two main currencies (USD and EUR), as well as REER (Real Effective Exchange Rate)
and NEER (Nominal Effective Exchange Rate); on the other hand the two indices which are
most representative to the course of the Bucharest Stock Exchange – BET and BET-C.
The REER (or Relative price and cost indicators) aim to assess a country's (or
currency area's) price or cost competitiveness relative to its principal competitors in
international markets. NEER is the weighted average of bilateral nominal exchange rates. It
measures the appreciation/depreciation of a currency against the weighted basket of
currencies whose countries are the main trading partners or competitors of the country of the
currency under study. Nominal exchange rate is the actual exchange rate quote in the market
at a given time.
 There are several ways of calculating the effective exchange rates, differing from the
International Monetary Fund, European Central Bank and the OECD. The data presented was
calculated according to the European Central Bank’s methodology and collected from the
internet website of the Directorate General for Economic and Financial Affairs of the
European Commission. To track the performance of the Romanian Stock Exchange we used
the monthly values of BET and BET-C.

4. Data description

We can see in the graph below the evolution of the two indexes (BET and BET-C)
which are most representative for the Bucharest Stock Exchange.

12000

10000

8000

6000

4000

2000

0
99 00 01 02 03 04 05 06 07 08

BET BET_C

BET is considered the reference index for the market and according to the BSE
website is calculated as a free float weighted capitalization index of the most liquid 10
companies listed on the BSE regulated market. BET-C is the composite index calculated as a
market capitalization index that reflects the price movement of all the companies listed on
BSE regulated market, first and second category, excepting the SIFs. We can see from the
chart a relatively indecisive trend of BET and BET-C in the period between the beginning of
the year 1999 and January 2002. Starting with 2002, the stock exchange, through BET and
BET-C, begins a rally until the summer of 2007.
 The second graph shows the trend of the exchange rate between the RON and the two
main currencies traded locally, the EUR and the USD. We can see a first period from the
beginning of 1999 until January 2003 a period of continuous depreciation of the RON in
nominal terms, than a period of stabilization and even appreciation starting with the end of
2004. The last period is characterized by volatility which could be driven by capital inflows to
Romania and the eagerness of the National Bank of Romania to target the inflation and
maintain the price stability through mechanisms that involve managing the exchange rate.

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0
99 00 01 02 03 04 05 06 07 08

EURRON USDRON

The below chart involving the NEER and the REER shows a more relevant situation.
 180

160

140

120

100

80

60

40

20
99 00 01 02 03 04 05 06 07 08

REER_EU_27 NEER_EU_27

5. Research methodology

The aim of this research is to determine the interactions between the stock exchange
and the exchange rates, on a bilateral or multilateral basis. In order to do this, I used the
following methods: a cointegration test and a Granger causality test.

The concept of cointegration would not have become useful in practice without
a statistical theory for testing for cointegration and for estimating parameters of linear systems
with cointegration. Granger and Robert Engle jointly developed the necessary techniques in
their classical and remarkably influential paper, Engle and Granger (1987), where the theory
of cointegrated variables is summed up and extended. The paper contains, among other
things, a rigorous proof of the Granger representation theorem. Engle and Granger (1987)
consider the problem of testing the null hypothesis of no cointegration between a set of I(1)
variables. They estimate the coefficients of a static relationship between these variables by
ordinary least squares and apply well-known unit root tests to the residuals. Rejecting the null
hypothesis of a unit root is evidence in favor of cointegration. The performance of a number
of such tests is compared in the paper.

In the research we will test for cointegration through the Engle-Granger

methodology, which involves the following steps (Enders, 2004):
 Step 1. Pretest the variables for their order of integration. By definition, cointegration
necessitates that the variables be integrated of the same order. Thus, the first step in the
analysis is to pretest each variable to determine its order of integration. The Dickey-Fuller,
augmented Dickey-Fuller or Phillips-Perron tests can be used to infer the number of unit roots
(if any) in each of the variables. If both variables are stationary, it is not necessary to proceed
since standard time-series methods apply to stationary variables. If the variables are integrated
of different orders, it is possible to conclude that they are not cointegrated.

Step 2. Estimate the long-run equilibrium relationship. If the results in Step 1 indicate
that both {yt}and {zt} are I(1), the next step is to estimate the long-run equilibrium
relationship in the form:
yt = β0 + β1zt + et
If the variables are cointegrated, an OLS regression yields a “super-consistent”
estimator of the cointegrating parameters β0 and β1. It was demonstrated by Stock in 1987 that
the OLS estimates of β0 and β1 converge faster than in OLS models using stationary variables.
In order to determine if the variables are actually cointegrated, denote the residual
sequence from this equation by {êt}. Thus {êt} is the series of the estimated residuals of the
long-run relationship. If these deviations from long-run relationship are found to be
stationary, the {yt} and {zt} sequences are cointegrated of order (1, 1). It could be convenient
if we could perform a Dickey-Fuller test on the residuals to determine their order of
integration.
Let us consider the autoregression of the residuals:
∆êt = a1 êt-1 + εt
Since the {êt} sequence is a residual from a regression equation, there is no need to
include an intercept term; the parameter of interest in the equation is a1. If we cannot reject the
null hypothesis a1 = 0, we can conclude that the residual series contains a unit root. Hence, we
conclude that {yt} and {zt} are not cointegrated. The more precise wording is awkward
because of a triple negative, but this is technically correct: if it is not possible to reject the null
hypothesis | a1| = 0, we cannot reject the hypothesis that the variables are not cointegrated.
Instead, the rejection of the null hypothesis implies that the residual sequence is stationary.
Given that both {yt} and {zt} were found to be I(1) and the residuals are stationary, we can
conclude that the series are cointegrated of order (1, 1).
 Step 3. Estimate the error-correction model. If the variables are cointegrated (i.e., if
the null hypothesis of no cointegration is rejected), the residuals from the equilibrium
regression can be used to estimate the error-correction model.
Engle and Granger (1987) propose a clever way to circumvent the cross-equation
restrictions involved in the direct estimation of the above equations. The value of the residuals
êt-1 estimates the deviation from long-run equilibrium in period (t – 1). Hence, it is possible to
use the saved residuals {êt-1} obtained in Step 2 as an instrument for the expression
yt-1 – β1zt-1.
Thus, using the saved residuals from the estimation of the long-run equilibrium
relationship, we can estimate the error-correcting model.
Step 4. Asses model adequacy. One way of doing this is by performing diagnostic
checks to determine whether the residuals of the VAR white noise. If the residuals are serially
correlated, lag lengths may be too short. A way to remediate this is to reestimate the model by
using lag lengths that yield serially uncorrelated errors.

The basic idea of the Granger causality test is that a variable X Granger causes Y if
the past values of X can help explain Y. However, if the Granger causality holds, this does not
guarantee that X causes Y. Put in other words, since the future cannot predict the past, if
variable X Granger causes variable Y, then changes in X should precede changes in Y.
Therefore, in a regression of Y on other variables (including its own past values) if we include
past or lagged values of X and it significantly improves the prediction of Y, then we can say
that X (Granger) causes Y. A similar definition applies if Y (Granger) causes X.
    Let us consider the following pair of regressions:
Yt = φ1Yt-1 + …+ φ pYt-p + β1Xt-1 + … + βqXt-q + et1

Xt = α 1Xt-1 + …+ α pXt-p + λ1Yt-1 + … + λ qYt-q + et2

We distinguish four cases:
- Unidirectional causality from X to Y is indicated if the estimated coefficients on
the lagged X in the first regression are statistically from zero as a group (i.e. βi≠0)
and the set of estimated coefficients on the lagged Y in the second regression is not
statistically different from 0 (i.e. λi=0).
- Unidirectional causality from Y to X exists if the set of lagged X coefficients in the
first regression is not statistically different from 0 (i.e. βi=0) and the set of lagged
Y coefficients in the second regression is statistically different from 0 (i.e. λi≠0).
 - Feedback, or bilateral causality, is suggested when the sets of X and Y
coefficients are statistically significantly different from 0 in both regressions.
- Finally, independence is suggested when the sets of X and Y coefficients are not
statistically significant in both regressions.

6. Results

When putting in practice the theory, we found out by performing ADF tests that all the
data are nonstationary, and therefore I(1) variables. Further on, we can test whether they are
cointegrated, that is, whether a linear function of these is a I(0). We will use the Engle-
Granger methodology.

We estimate the residuals by performing the method of least squares. We save the
residuals, then we ADF test them for stationarity, which means we estimate the equations:
k
et  c  et 1  t   i et 1   t
i 1

k
ut  h  ut 1  t    i ut 1   t
i 1

In case the time series of the residuals εt is stationary, we claim that the stock market
indices yt and the exchange rate xt are cointegrated. Otherwise, the residuals εt are non-
stationary and no cointegration relationship is detected. Cointegration between the variables xt
and yt indicates the presence of a long run equilibrium relationship represented by the linear
relation between them. At the same time, the presence of a cointegrating relationship among
the variables indicates that performing a Granger causality test in a standard form is useless,
since at least a unidirectional causality between them should exist.

By performing the ADF test also on the residuals, we found out that the residual time
series are I(1) variables. Consequently, the Engle-Granger methodology showed that no
cointegration exists between the stock market and the exchange rate.
Further on, we are trying to see if the result is confirmed by the Johansen-Julius
methodology. By applying the cointegrating test to all the variables, the results suggest the
presence of cointegration between the two stock market indices and the exchange rates, either
nominal bilateral, nominal effective or real effective rates. For the overall interval, both the
trace and the eigenvalue statistics indicate cointegration between BET and two of the nominal
effective rates (NEER_41 and NEER_EA15), as well as between BET and the real effective
exchange rate against the EU-27 partners (REER_EU27). The other stock exchange index,
BET-C, is found to be cointegrated with the nominal effective rate against Romania’s main 41
trading partners (NEER_41) and with the bilateral EURRON exchange rate. No cointegration
is detected between this index and one of the real exchange rates.

When standard Granger causality test were performed on non-cointegrated variables,

we identified unilateral causality relations from the stock prices to exchange rates for the
entire period. The results of modified Granger tests indicate that exchange rates are the
leading variables for the stock prices and that the stock market adjusts quite dramatically to
changes in the exchange rates in one month time. The magnitude of adjustment might indicate
even an over-reaction of the stock market to developments on the foreign exchange market,
which points toward a central role played by the exchange rate in the Romanian economy, on
one hand, and in the decision of players in the stock market, on the other hand.

Further to this research, the present work could be extended to dividing the period
analyzed into two sub periods - one from January 1999 until October 2004 and the second
from November 2004 until December 2008. The reason for dividing the period in this way is
that in 2004 the National Bank of Romania changed its monetary policy towards direct
targeting of inflation. It was also in this period when the NBR’s policy directed towards more
flexibility in exchange rates and higher capital inflows coming to Romania.

7. CONCLUSIONS

The study uses standard bivariate cointegration tests, using both the Engle-Granger
and the Johansen-Juselius methodology, as well as standard and modified Granger causality
tests to explore the interactions between exchange rates and stock market prices applied to
Romania, one of the emerging economies in Central and Eastern Europe and a new member
of European Union since January 2007. In the analysis, three types of exchange rates of the
Romanian currency are used: bilateral rates against the euro and the US dollar, effective
nominal rates and real effective rates. The two indices of the Bucharest stock exchange were
capturing the evolution of stock prices. The analysis involved the January 1999 – December
2008 period.
The procedures employed for the cointegration results offer contradictory results.
While the application of the Engle-Granger methodology indicates no cointegration between
the exchange rates and the stock prices, the use of the Johansen-Juselius procedure suggests
the presence of cointegration between the two stock market indices and the exchange rates,
either nominal bilateral, nominal effective or real effective rates. The lack of cointegration
indicated by the Engle-Granger procedure may be due to the lower power of the test, as
recognized in the literature.

When standard Granger causality test were performed on non-cointegrated variables,

we identified unilateral causality relations from the stock prices to exchange rates for the
entire period. The results of modified Granger tests indicate that exchange rates are the
leading variables for the stock prices and that the stock market adjusts quite dramatically to
changes in the exchange rates in one month time. The magnitude of adjustment might indicate
even an over-reaction of the stock market to developments on the foreign exchange market,
which points toward a central role played by the exchange rate in the Romanian economy, on
one hand, and in the decision of players in the stock market, on the other hand.

Further to this research, the present work could be extended to dividing the period
analyzed into two sub periods - one from January 1999 until October 2004 and the second
from November 2004 until December 2008. The reason for dividing the period in this way is
that in 2004 the National Bank of Romania changed its monetary policy towards direct
targeting of inflation. It was also in this period when the NBR’s policy directed towards more
flexibility in exchange rates and higher capital inflows coming to Romania.

8. BIBLIOGRAPHY

Allayannis, G. (1996), “Exchange rate exposure revisited”, University of Virginia Working

paper
Aydemir, O., Demirhan E. (2009), “The Relationship between Stock Prices and Exchnge
Rates: Evidence from Turkey”, EuroJournals Publishing Inc.
Bartov, E., Bodnar, G. (1994), “Firm valuation, earnings expectations, and the exchange-rate
exposure effect”, Journal of Finance Vol. 49, No. 5, pp. 1755-1788
Cerny, Alexandr (2004) “Stock Market Integration and the Speed of Information
Transmission”, Working paper CERGE-EI 242, Charles University Prague
Choi, J., Prasad, A. (1995), “Exchange rate sensitivity and its determinants: A firm and
industry analysis of U.S. Multinationals”, Financial Management, Vol. 24, No. 3, pp. 77-
88
Chow, Edward, H., Lee, Wayne, Y., Solt, Michael, E. (1997) “The Exchange-Rate Risk
Exposure of Asset Returns”, The Journal of Business, Vol. 70, No. 1, pp. 105-123
De Jong, A., Ligterink, J., Macrae, V. (2002), “A Firm-Specific Analysis of Exchange-Rate
Exposure of Dutch Firm” Erasmus Research Institute of Management Working Paper
Doong, Shuh-Chyi, Yang, Sheng-Yung, Wang, Alan T. (2005) “The Dynamic Relationship
and Pricing of Stocks and Exchange Rates: Empirical Evidence from Asian Emerging
Markets”, Journal of American Academy of Business, Vol. 7, No. 1, pp. 118-123
Doukas, J.A., Hall, P.H., Lang, L.H.P. (2003), “Exchange Rate Exposure at the Firm and
Industry Level”, Financial Markets, Institutions & Instruments, Vol. 12, No. 5, pp. 291-
346
Enders, W. (2004) - “Applied econometric time series”, John Wiley and Sons, Inc.
El-Masry, A. (2003), “The Exchange Rate Exposure of UK Nonfinancial Companies:
Industry-Level Analysis” Manchester Business School Working Paper
Engle, Robert F., Granger, Clive W.J (1987), “Co-integration and Error Correction Estimates:
Representations, Estimation and Testing”, Econometrica, Vol. 55, No. 2, pp. 251-276
Engle, Robert F., White, Halbert (1999), “Cointegration, Causality, and Forecasting”, Oxford
University Press, pp. 135 - 211
Entorf, H., Jamin, G. (2002), “Dance with the Dollar: Exchange Rate Exposure on the
German Stock Market”, Working Paper, available at http://ssrn.com/abstract=341320
[Accessed 10.09.2007]
Foresti, P. (2006), “Testing for Granger Causality between Stock prices and Economic
Growth”, MPRA Paper No. 2692, online at http://mpra.ub.uni-muenchen.de/2692/
[Accessed 10.09.2007]
Gao, T. (2000), “Exchange rate movements and the profitability of U.S. multinationals”,
Journal of International Money and Finance, Vol. 19, pp. 117-134
Granger, Clive (1969), “Investigating Causal Relations by Econometric Models and Cross-
Spectral Methods”, Econometrica, Vol. 37, No. 3, pp. 424-438
Granger, Clive (1986), “Developments in the Study of Cointegrated Economic Variables”,
Oxford Bulletin of Economics and Statistics, Vol. 48, No. 3, pp. 213-228
Gujarati, Damodar (2003) Basic Econometrics, Fourth Edition, Boston, MA: Mc-Graw Hill
Bartram, S. (2004), “Linear and nonlinear foreign exchange rate exposures of German
nonfinancial corporations”, Journal of International Money and Finance, Vol. 23, pp. 673-
699
Glaum, M. & Brunner, M. & Himmel, H. (2000). The DAX and the Dollar: The Economic
Exchange Rate Exposure of German Corporations. Journal of International Business
Studies, 31(4), 715-724
Gunduz, Lokman, Hatemi-J Abdulnasser (2004) “On the Causal Relationship Between Stock
Prices and Exchange Rates: Evidence from the MENA Region”, Beykent University and
University of Skövde Working Paper, Istanbul and Skövde
Hamilton, James Douglas (1994) Time Series Analysis, Princeton, New Jersey: Princeton
University Press
Hansen, Peter R. (2000), “The Johansen-Granger Representation Theorem: An Explicit
Expression for I(1) Processes”, paper available online at http://repositories.cdlib.org/
ucsdecon/2000-17
Ibrahim, Mansor H. (2000), “Cointegration and Granger Causality Tests on Stock Price and
Exchange Rate Interactions in Malaysia”, ASEAN Economic Bulletin, VOl.17, No. 1, pp.
36-47
Johansen, Soren (1988), “Statistical Analysis of Cointegration Vectors”, Journal of Economic
Dynamics and Control, Vol.12, pp. 231-254
Johansen, Soren, Juselius, Katarina (1990), “Maximum Likelihood Estimation and Inferences
on Cointegration – With Application to the Demand for Money”, Oxford Bulletin of
Economics and Statistics, Vol. 52, No. 2, pp. 169-210
Jorion, P. (1990), “The exchange rate exposure of U.S. multinationals”, Journal of Business,
Vol. 63, pp. 331-345
Koop, G. (2000), “Analysis of economic data”, John Wiley and Sons, Ltd.
Kyimaz, H. (2003), “Estimation of foreign exchange exposure: an emerging market
application”, Journal of Multinational Financial Management, Vol.13, pp. 71-84
Koutmos, G., Martin, A. (2003), “First- and Second-Moment Exchange Rate Exposure:
Evidence from U.S. Stock Returns”, The Financial Review, Vol. 38, pp. 455-471
Lyons, S.E., Murinde, V. (1994), “Cointegrated and Granger causality testing of hypothesis
on supply lending and demand following finance”, Economic Notes, Vol. 23, No. 2, pp.
308-316
Kim, Ki-ho (2003) “Dollar exchange rate and stock price: evidence from multivariate
cointegration and error correction model”, Review of Financial Economics, Vol. 12, pp.
301-313
MacDonald, R., Kearney, C. (1987), “On the specification of Granger-causality tests using the
cointegration methodology”, Economics Letters, Vol. 25, pp. 149-153
Miller, K., Reuer, J. (1998), “Firm strategy and economic exposure to foreign exchange rate
movements” Journal of International Business Studies, 29(3), 493-514
Miller, S.M., Russek, F.S. (1990), “Co-integration and error correction models: the temporal
causality between government taxes and spending”, Southern Economic Journal, Vol. 57,
No. 1, pp. 221-229
Murinde, V., Poshakwale, S. (2004) “Exchange Rate and Stock Price Interactions in European
Emerging Financial Markets Before and After the Euro”, Working Paper Birmingham
Business School, University of Birmingham
Phylaktis, Kate, Ravazzolo, Fabiola (2005), “Stock prices and exchange rate dynamics”,
Journal of International Money and Finance, Vol. 24, p. 1031-1053
Tabak, Benjamin M. (2006) – “The Dynamic Relationship between Stock Prices and
Exchange Rates: evidence from Brazil”
Wooldridge, J.M. (2006), Introductory Econometrics. A Modern Approach, 3rd Edition,
South-Western Publishing Company
forums.eviews.com