Dynamic correlation between stock prices and exchange rates

摘要

This article examined the interaction between stock price and exchange rate and explored their dynamic correlation influenced by the stock market volatility. We used newly developed Smooth Transition Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity (STCC-GARCH) model and applied weekly data from Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand for the period 2000 to 2008 to test the dynamic correlation hypothesis. The empirical results indicated that there are significant price spillovers from stock market to foreign exchange market for Indonesia, Korea, Malaysia, Thailand and Taiwan. Furthermore, the correlation between stock and foreign exchange markets becomes higher when stock market volatility increases in Asian emerging markets except in the Philippines. These results are important for international investors and managers to devise hedging and diversification strategies for their portfolios. The evidence suggests that investors can hedge risk between stock and foreign exchange in domestic markets when the stock market is stable. Otherwise, when the stock market becomes volatile, investors diversify their portfolio internationally for hedging risk since the correlation between stock and foreign exchange markets becomes higher.