Journal of Applied Finance & Banking

On the Comovements among European Exchange Rates and Stock Prices: A Multivariate Time-Varying Asymmetric Approach

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  • Abstract

    The analysis of time varying correlation between stock prices and exchange rates in the context of international investments has been well researched in the literature in last few years. In this paper we study the interdependence of US dollar exchange rates expressed in euro (EUR) and three European stock prices (DAX30, CAC40 and FTSE100). Focusing on different phases of the Global financial crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC), we adopt a multivariate asymmetric dynamic conditional correlation EGARCH framework, during the period spanning from January 1, 2002 until December 10, 2013. The empirical results suggest asymmetric responses in correlations among the three European stock prices and exchange rate. Moreover, the results indicate an increase of exchange rates and stock prices correlations during the crisis periods, suggesting the different vulnerability of the currencies. Finally, we find some significant decreases in the estimated dynamic correlations, indicating existence of a “currency contagion effect” during turmoil periods.