Dynamic nexus between exchange rate and stock prices in the major East European economies

Abstract

This paper investigates the dynamic conditional correlation (DCC) between stock returns and exchange rate in four East European emerging markets. Due to persistent long memory and the presence of the asymmetric effect in all asset markets we applied DCC-FIAPARCH model. The estimated negative DCC parameters in all scrutinized countries confirmed that portfoliobalanced theory has predominance in the short run in all selected economies. DCC parameters revealed significant time-varying behaviour, especially during the major crisis periods. By embedding dummy variables in the variance equations, we came to the conclusion that global shocks affect the volatility of DCCs. Particularly, it happened during the Global Financial Crisis and European sovereign debt crisis, but the effects were not linearly equal in all countries. Complementary rolling analysis unveils how conditional volatilities of analysed assets influence DCC. The results suggested that exchange rate conditional volatility has higher influence on DCC than stock conditional volatility.