Articles from Cass Knowledge

Economic Integration and the Currency and Equity Markets Nexus

Examining the impact of economic integration on the relationship between the currency and equity markets for a group of Asian emerging economies.

The role of economic integration has evolved significantly with the liberalisation of trade and capital flows across the globe, and has had a strong impact on the complexity of financial markets, which makes it imperative to investigate its impact on the currency-equity markets nexus.

This paper provides an examination of the impact of economic integration on the currency and equity markets nexus using a non-linear asymmetric framework to capture the non-linearities found in many underlying variables.

In this study, the authors investigate the dynamic relationship between the equity return differentials and real exchange rate changes for a group of Asian emerging markets over the period 2005-2016, by estimating the dynamic conditional correlations, and then examining the impact of economic integration on that relationship.

The sample consists of nine countries, incuding China and India.

The conditional correlation analysis shows that there is a negative correlation between real exchange rate changes and equity return differentials in all the countries apart from China. For some countries it was found to have become deeper during the Global Financial Crisis. Most importantly it finds that economic integration, both real and financial, has an asymmetric impact on the relationship between the two markets both in the short-run and in the long-run. A key finding is that applying a linear framework does not bring out the impact of financial integration.

Finally, the analysis implies that the current climate of reverse economic integration, with the building up of trade tariff tensions, otherwise referred to as “deglobalisation”, will certainly have an impact on the two markets, with repercussions for both governments and investors.

For those investors, a sound understanding of the currency-equity markets linkages can help to formulate effective investment decisions regarding hedging arrangements and overall portfolio performance.

The paper Economic Integration and the Currency and Equity Markets Nexus is available to download at City Research Online. It has been published in International Journal of Finance and Economics.