Dynamic relationship between stock prices and exchange rates in emerging markets: Evidence from fragile five economies

Abstract

All the emerging markets are vulnerable to the fears of capital outflows after the US Federal Reserve’s tapering on May 22, 2013. The term “Fragile Five” was introduced by a research note of Morgan Stanley to refer to the countries of Brazil, India, Indonesia, South Africa and Turkey. The aim of this study is to examine whether there are stock and foreign exchange markets integration among Brazil, India, Indonesia, South Africa and Turkey. The authors employ cointegration-based tests, vector error correction modeling techniques, and Granger causality tests to examine the long-run and short-run linkages between stock prices and exchange rates. The results of cointegration tests suggest that there is one long-run stationary relationship between the stock indices and the foreign exchange rates. Four of the Fragile Five (excluding Brazil) show that the stock prices are positively associated with exchange rates. Finally, vector error correction estimates lead to miscellaneous results. © 2016 by IGI Global.