Identifying long-run relationships between the exchange rate, interest rates and stock prices

Wong, D. K. T. and MacDonald, R. (2023) Identifying long-run relationships between the exchange rate, interest rates and stock prices. Applied Economics, (doi: 10.1080/00036846.2023.2198194) (Early Online Publication)

Abstract

This study investigates the long-run relationship between the exchange rate, interest rate, stock prices and output. The results demonstrate that a single restricted relationship is accepted when a structural break is incorporated into the cointegrating vector. Compared with the hypothesis tests on the single restricted relationship, the hypothetical structure comprising multiple relationships in the cointegrating vector is generally accepted in most countries, confirming the interaction between the relationships in the system. Our findings regarding the real exchange rate and stock price differentials appear to contradict the uncovered equity returns parity condition, whereas the relationship between the real exchange rate and interest rate differentials is consistent with the flexible price approach.

• Item Type: Articles
• Status: Early Online Publication
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: MacDonald, Professor Ronald and Wong, Kai
• Authors: Wong, D. K. T., and MacDonald, R.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Applied Economics
• Publisher: Taylor and Francis
• ISSN: 0003-6846
• ISSN (Online): 1466-4283
• Published Online: 23 April 2023
• Copyright Holders: Copyright © 2023 Informa UK Limited, trading as Taylor and Francis Group
• First Published: First published in Applied Economics 2023
• Publisher Policy: Reproduced in accordance with the publisher copyright policy