The Dynamic Relationship Between Stock Prices and Exchange Rates: Evidence from Four Transition Economies

This article examines the dynamic relationship between exchange rates and stock prices in four Easter European markets, Czech Republic, Hungary, Poland and Slovakia, using stock price and exchange rate data from these countries, as well as stock prices from the United States, Germany and the United Kingdom. The data set consists of daily data over a 7 year period from 1999 to 2006. Both the long-run and the short-run association between these variables are analyzed. We employed the Johansen cointegration technique, Vector Error Correction Modeling and the standard Granger causality test to analyze the relationship between these two financial variables. Our findings show that there is no evidence of stock prices and exchange rates moving together either in the long-run or in the short-run, with the exception of Slovakia, where cointegrating relationships were found. In terms of our causality analysis our results show a unidirectional causal relationship form the exchange rates to the stock prices in the case of Hungary, Poland and Czech Republic. There is also evidence of causality from the Hungarian exchange rate to the United Kingdom stock prices, from the Polish exchange rates to the United Kingdom stock prices, from the Czech Republic exchange rate to the United Kingdom stock prices and from the Slovakian exchange rates to the United Kingdom stock prices. And finally we also found evidence of causality from the stock prices to the stock prices in the case of Hungary to United Kingdom, United Kingdom to Poland, and the United States to Poland.