Testing for Causality in Mean and Variance between the Stock Market and the Foreign Exchange Market: An Application to the Major Central and Eastern European Countries
Cevik, Emrah Ismail; Koseoglu, Sinem Derindere
Year: 2013 Volume: 63 Issue: 1 Pages: 65-86
Abstract: The aim of this paper is to investigate the presence of a causality relationship between the stock market and the foreign exchange market in the Czech Republic, Hungary, Poland, and Turkey. We first analyze the existence of structural breaks in the variance of stock and foreign exchange rate returns series. Then, we employ the causality-in-mean/variance test proposed by Hong (2001). Our empirical results suggest that stock markets Granger-cause foreign exchange markets for all the countries in both mean and variance. Therefore, it can be said that the stock market has an important role in the price discovery process for the foreign exchange market for the countries in question.
JEL classification: G10, F31, C20
Keywords: stock and foreign exchange markets, structural breaks in variance, volatility spillovers, causality in mean and variance
RePEc: http://ideas.repec.org/a/fau/fauart/v63y2013i1p65-86.html
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