Proceedings of the 2nd Economics & Finance Conference, Vienna

RELATIONSHIP BETWEEN EXCHANGE RATES AND STOCK PRICES IN TRANSITION ECONOMIES EVIDENCE FROM LINEAR AND NONLINEAR CAUSALITY TESTS

GUNAY AKEL

Abstract:

The existence of causation linkage between stock prices and exchange rates is one of the popular debate especially since the beginning of 1990s. The aim of this paper is to investigate the nature of the causal transmission mechanism between foreign exchange and stock markets in 9 transition countries (i.e., Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Russia) for the periods of 1995-2011. The results of the paper show that uni-directional linear Granger causality running from exchange rates to stock prices for 4 countries (i.e., Czech Republic, Hungary, Poland, and Romania) and a feedback exists between two markets for only Russia when both linear and nonlinear Granger causality are used.

Keywords: Exchange Rates, Stock Prices, Transition Economies, Linear and Nonlinear Causality Tests

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