Abstract
The symmetrical relationship between currency and equity markets has gained much attention among academicians and policy makers in the recent era. Many studies conducted on this relationship have concluded that there is short-run relationship between these variables and found less evidence about a long-run relationship. Moreover, all previous studies supposed the linear or symmetrical relationship between these variables. In this study, we use daily time series data from G8+5 countries and Pakistan for 2000–2016 and apply linear and non-linear autoregressive distributed lag (ARDL) to check the symmetrical and asymmetrical relationship between currency and equity markets. Results have shown that there are asymmetrical linkages between the currency and equity markets.
Highlights
Are currency and equity markets interrelated? If these markets are interdependent what kind of relationship do they have? Are these markets linearly or non-linearly related? All these questions have gained substantial consideration with the development of money and asset markets, increased flexibility in currency market policies, and recreation of foreign exchange policies
Currency appreciation or depreciation will affect all companies at the domestic level or at the multinational level
If a company benefits from the increase in sales due to currency depreciation, it will lead to high stock prices and vice versa
Summary
Are currency and equity markets interrelated? If these markets are interdependent what kind of relationship do they have? Are these markets linearly or non-linearly related? All these questions have gained substantial consideration with the development of money and asset markets, increased flexibility in currency market policies, and recreation of foreign exchange policies. To test the relationship between currency and equity market, there are two theoretical approaches. If domestic currency depreciates, it will increase the profits of export firms. If profits of the export-oriented firms are high, this can lead to the increase in the stock prices of firms. At the same time, it will lead to an increase in the cost of imported goods, so if firms are not export-oriented they suffer losses in the form of high production costs due to currency depreciation. The first approach is based on the expectations of investors, if they expect that the company is going to be in profit they invest more and this would result in appreciation of currency. The second approach is based on the wealth effect if domestic currency appreciates or depreciates, which will change the stock price
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