Relationship between stock and exchange rates of emerging market economies

Stocks and exchange rates are important market types that have the ability to quickly reflect the policy changes applied and the effects of these changes on the market. There is no consensus in the literature regarding the existence of the relationship between these two variables and the direction of the relationship. In this study, the relationship between stock and exchange rate has been analyzed using panel data analysis method for the 1996:01-2019:10 period in E-7 countries known as emerging market economies, and it is aimed to contribute to the literature. In addition, inflation has been included as the control variable in order to make the analysis more robust. The Durbin-Hausman Cointegration Test, which takes into account the cross-sectional dependency to determine the long-term relationship between variables, and Emirmahmutoğlu and Köse Causality Test, which measures causality as a panel as a country group and a country separately, in order to determine the cause-effect relationship. In the analysis results of the Durbin-Hausman Cointegration Test, it was seen that the stock has a long-term relationship with both the exchange rate and inflation. According to the results of Emirmahmutoğlu and Köse Causality Test, no causality was found between the exchange rate and the stock on a panel basis, but it was observed that there was a causality from inflation, which is our control variable, to equity securities. When the causality test results were analyzed on a country basis, results varying from country to country were obtained.