Exchange Rates and Stock Prices in the Long Run and Short Run

Reference:

Morley, B., 2009. Exchange Rates and Stock Prices in the Long Run and Short Run. Working Paper. Bath, UK: Department of Economics, University of Bath. (Bath Economics Research Working Papers; 5/09)

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Official URL:

http://www.bath.ac.uk/economics/research/workingpapers.html

Abstract

Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results.

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