Exchange Rates And Equity Markets: Evidence From Some European Countries

Abstract

This paper employs cointegration analysis, vector error correction and vector autoregressive modeling along with Granger causality tests to examine the effect of exchange rates on the stock market indexes for a group of  European Union countries using daily data from 1999-2009.  The results suggest that the transmitting mechanism for the influence of the exchange rate in the stock market is foreign investment.  Evidence also highlights that there is no clear causality from stock market to exchange rates, or vice versa, for the direction of the causation, suggesting that exchange rates and stock markets operate as an integrated system continuously influencing each other.