Determinants of the dynamic correlation patterns between stock prices and exchange rates

The foreign exchange market and the stock market are two of the most important markets in which investors and investors participate. The first is the largest market in terms of transaction volume. The question of whether there is a relationship between the two markets is of interest to investors, traders, firms' decision-makers and policymakers of financial institutions. In this study, we investigated the relationship between ER and SPI variables in terms of dynamic causality with the VAR model, in terms of long-term equilibrium relationship with cointegration technique, and analyzed whether the results support the posits and implications of traditional and stock-oriented models. IR functions analysis, FEVD analysis tools were also used for further inference. Data is from selected emerging countries including BRICS countries. In order to examine the impact of the crisis period, time series were examined as three periods. The results indicate that there is no L-R equilibrium relationship between SPI and ER variables. Granger causality results are mixed. Before-crises period results indicate there is no causal relationship between ER and SPI variables. Brazil and South Africa during the crisis and Turkey and South Korea post-crisis period SPI leads to the ER. This result supports the proposal of portfolio balance models. After-crises period in China, India, and Russia, ER leads to SPI. This result supports the proposal of flow models. No two-way Granger causality was found in any case. Variance decomposition analysis and correlation coefficients indicate that the association between SPI and ER variables increased during the 2008 banking crisis. Keywords Exchange rates, Stock prices, Cointegration, Granger non-causality, VAR Model, Variance Decomposition Analysis, Impulse Response Function Analysis