The Stock Price-Exchange Rate Nexus for Emerging and Developed Market Economies: Fresh Evidence from Recently Developed Advanced Panel Data Techniques

Abstract

The purpose of this paper is to investigate the short- and long-run interactions between the real effective exchange rates and stock prices. Using a sample of monthly panel data for 23 developed and 19 emerging market economies, this study employs six recently developed advanced panel data techniques. The results reveal clear and strong evidence that the flow-oriented model does not hold for either emerging or developed markets, in the short- or in the long-run. By contrast, the findings provide strong, robust, and reliable evidence that the stock-oriented model is valid for emerging markets. This means that changes in stock prices have a positive and statistically significant impact on real effective exchange rates. For developed markets, however, only reasonable evidence supports the stock-oriented model in the long-run. The finding that stock prices exert a robust and reliable long-run effect on real effective exchange rates, particularly in emerging market economies, diverges from the general literature, which mainly reports only a short-term relationship between the two relevant financial markets; nevertheless, these findings are consistent with some recent studies that, using novel panel data techniques, also document long-run support for the validity of stock-oriented model.