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DYNAMIC CORRELATION BETWEEN STOCK RETURNS AND EXCHANGE RATE AND ITS DEPENDENCE ON THE CONDITIONAL VOLATILITIES – THE CASE OF SEVERAL EASTERN EUROPEAN COUNTRIES
Author(s) -
Živkov Dejan,
Njegić Jovan,
Pavlović Jasmina
Publication year - 2016
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12059
Subject(s) - economics , econometrics , exchange rate , stock (firearms) , portfolio , volatility (finance) , currency , financial economics , autoregressive conditional heteroskedasticity , monetary economics , geography , archaeology
The objective of the paper is to determine whether the linkage between stock returns and exchange rates in several Eastern European countries was in accordance with the flow oriented model or the portfolio‐balance approach. The dynamic interdependence between exchange rate and stock returns is determined using the Dynamic Conditional Correlation (DCC) framework. The results pointed to a negative dynamic correlation which is in line with portfolio‐balance approach. Rolling regression revealed that conditional correlation was affected primarily by conditional volatility of currency, while the impact of stock returns volatility was negligible.