Flight-to-quality and correlation between currency and stock returns

Cho, Jinwan; Choi, Joung Hwa; Kim, Tae-Yong; Kim, Woojin

doi:10.1016/j.jbankfin.2014.09.003

Cited by 79 publications

(29 citation statements)

References 26 publications

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“…The momentum between currency and stocks market relationship suggests a meek liberalization in these markets. These results, albeit weak, substantiate the findings suggested for the other emerging markets (Cho et al, 2012;Moore and Wang, 2014) and oppose the existing observations for the developed markets (Cho et al, 2012).…”

Section: Discussionsupporting

confidence: 57%

“…Similarly, Granger et al (2000) empirically analyze the link between exchange rates and stock prices in the Asian financial crisis context in Asian countries using daily data and report a strong co-movement in the majority of their sampled countries. Cho et al (2012) suggest a positive (negative) correlation between the currency and equity markets for the emerging (advanced) economies. Some other related studies (Qiao et al, 2008;Walid et al, 2011;Zhao, 2010) also report the existence of strong co-movement between exchange rates and stock prices.…”

Section: Brief Empirical Literaturementioning

confidence: 99%

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Dynamics between currency and equity in Chinese markets

Aftab

Ahmad

Ismail

2015

Chinese Management Studies

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Purpose-This study aims to examine the dynamics between exchange rate and equities contextualizing the current liberal currency regime in China. This investigation also extends the analysis to explore the potential important factors influencing the interactions between these two markets. After exchange rate reforms, currency issue has emerged as a new dimension in portfolio decisions and diversification strategies in Chinese equity markets. Design/methodology/approach-This research uses the dynamic conditional correlation generalized autoregressive conditional heteroskedasticity model proposed by Engle (2002) to explore the dynamic interactions between the currency and stock markets. Further, the paper uses regression analysis to explore the explanatory channels of the correlation. The sample comprises 1,265 listed companies over the period 2005-2012 with daily, weekly and monthly observations. To make analysis robust, the study also considers different exchange rates and equities belonging to different industries. Findings-The findings suggest that exchange rate and stock price are related negatively. This conduit increases during the financial crisis period. This association is more prominent at monthly frequency than that of daily and weekly frequencies, which may refer to the noise factor in the high-frequency data. For a portfolio diversification point of view, currency may be considered an alternative diversifier against equity in China. The results also suggest a weak influence of market forces on the association between the currency and stock markets. Originality/value-Much of the related past research is based on co-integration approaches and limited to the relationship between currency and equity markets without exploring the determining channels of this important connection. This study uses a more suitable approach to examine the topic and also investigates the determinants. Besides, previous studies take index data which may be poor to depict the overall market outlook. This paper proceeds with firm-level data which are more appropriate to expose the overall market outlook and investor behavior. This research also draws valuable implications.

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Section: Discussionsupporting

confidence: 57%

Section: Brief Empirical Literaturementioning

confidence: 99%

Dynamics between currency and equity in Chinese markets

Aftab

Ahmad

Ismail

2015

Chinese Management Studies

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“…Cappiello and De Santis (2007) report imperfect support for the relationship between a currency's appreciation and the relative over-performance of it stock market. Cho et al (2016) document that while the correlation between domestic currency returns and stock returns differentials is negative among developed economies (in accordance with UEP), it is positive among emerging economies (confirmed for Asian countries by Fuertes et al (2018). Such differences may explain why Cenedese et al (2016) do not find any support for UEP for a cross-section of 43 countries.…”

Section: Introductionmentioning

confidence: 87%

“…Empirical assessments of UEP vary from partial support (Cappiello and De Santis, 2007;Cho et al, 2016;Curcuru et al, 2014;Hau and Rey, 2006) to total rejection (Cenedese et al, 2016). For instance, Hau and Rey (2006) and Curcuru et al (2014) do not find evidence of a positive relationship between net bilateral capital outflows and domestic currency depreciation for a number of countries, including Germany.…”

Section: Introductionmentioning

confidence: 99%

The January effect in the foreign exchange market: Evidence for seasonal equity carry trades

Girardin

Namin

2019

Economic Modelling

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In this study, we investigate monthly seasonality in the foreign exchange market. Given the well-known recurrent higher returns in some month than in others in stock markets around the world, we consider it likely that a seasonal outperformance of a country's stock market over another is associated with similar seasonal patterns in capital flows and exchange rates. A seasonal profit (carry trade) opportunity can be created by the simultaneous appreciation of a country's currency and the outperformance of its stock market. By focusing on the world's key currency pairs, the US dollar-Deutsche mark and the US dollareuro, and by using a Markov-switching framework, we document persistent January and December effects in the foreign exchange market from 1971 to 2017. Analysis of the German-US stock returns differential and their bilateral capital flows reveal similar month effects in 65% of the whole sample.

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“…Given the poor performance of interest rate differentials in predicting currency moves, it has become common to focus on risk factors, particularly those derived from equity or commodity markets. On the one hand, the literature linking exchange rates to equity markets includes: Diamandis and Drakos (2011) for four Latin American countries, Kalra (2011), Lin (2012) for Asian currencies, Wong (2017) for four Asian and three major currencies, Andreou et al (2013) for emerging markets, Chkili and Nguyen (2014) for BRICS countries, Caporale et al (2014) for the recent financial crisis period, and Cho et al (2016), who proxy global stock market conditions by MSCI world index returns in local currencies and report higher correlations (on average) for developed than emerging markets between 1996 and 2009. Another body of work by Chue and Cook (2008) and Chang et al (2013) examines the degree of exchange rate exposure (at firm level) with causality running from currency to stock returns.…”

Section: Introductionmentioning

confidence: 99%

Exchange rates, oil prices and world stock returns

Mollick

Sakaki

2019

Resources Policy

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This paper examines responses of 14 major currency/USD pairs to two global factors (oil and world equity returns) from January 1999 to July 2017, a period that comprises the global financial crisis and oil price collapse in late 2014. With global equity markets advancing, risk tolerance increases and higher oil prices make "commodity currencies" stronger. GARCH (1, 1) models identify preliminary links and DCC-GARCH modeling strengthens these findings under time-varying correlations: safe-haven currencies depreciate with higher global equity markets and commodity currencies appreciate with oil price gains. In emerging markets, only the South African Rand displays meaningful currencyequity links.

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Flight-to-quality and correlation between currency and stock returns

Cited by 79 publications

References 26 publications

Dynamics between currency and equity in Chinese markets

Dynamics between currency and equity in Chinese markets

The January effect in the foreign exchange market: Evidence for seasonal equity carry trades

Exchange rates, oil prices and world stock returns

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