The dynamic relationship between stock, bond and foreign exchange markets

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dc.authorwosidKal, Suleyman/ABE-3372-2020
dc.contributor.authorKal, Suleyman Hilmi
dc.contributor.authorArslaner, Ferhat
dc.contributor.authorArslaner, Nuran
dc.date.accessioned2024-07-18T20:42:34Z
dc.date.available2024-07-18T20:42:34Z
dc.date.issued2015
dc.departmentİstanbul Bilgi Üniversitesien_US
dc.description.abstractThis paper investigates whether the deviation of a currency from its fundamentally determined rate of return affects the relationship between interest rates and stock market yields. A time-varying transition probability, the Markov-switching vector autoregressive (MS-VAR) model, is utilized for this purpose. Wald and likelihood ratio tests are computed and used as model adequacy measures. In order to analyze the link between the variables, impulse-response functions are employed. A sticky price exchange rate model is used to show the fundamentally determined rate of return of currencies. States are defined as either overvalued or undervalued, depending on the position of the observed exchange rate compared to its fundamentally determined rate. The model is applied to four major currencies: the Australian Dollar, the Canadian Dollar, the Japanese Yen, and the British Pound. Transition between the states is linked to the risk-adjusted excess return (the Sharpe ratio) of the debt and equity markets of the respective currencies in order to understand whether over- and undervaluation is connected to the returns in these markets. The results provide evidence that the relationship between economic fundamentals and nominal exchange rates are subject to change depending on the over- or undervaluation of the currencies relative to their fundamentally determined rate of return. An extension of this result shows that the Sharpe ratios of debt and equity investments in the currencies influence the evolution of the transitional dynamics of the exchange rates' deviation from their fundamental values. (C) 2015 Published by Elsevier B.V.en_US
dc.identifier.doi10.1016/j.ecosys.2015.03.002
dc.identifier.endpage607en_US
dc.identifier.issn0939-3625
dc.identifier.issn1878-5433
dc.identifier.issue4en_US
dc.identifier.startpage592en_US
dc.identifier.urihttps://doi.org/10.1016/j.ecosys.2015.03.002
dc.identifier.urihttps://hdl.handle.net/11411/7336
dc.identifier.volume39en_US
dc.identifier.wosWOS:000366884100003en_US
dc.identifier.wosqualityQ3en_US
dc.indekslendigikaynakWeb of Scienceen_US
dc.language.isoenen_US
dc.publisherElsevier Science Bven_US
dc.relation.ispartofEconomic Systemsen_US
dc.relation.publicationcategoryMakale - Uluslararası Hakemli Dergi - Kurum Öğretim Elemanıen_US
dc.rightsinfo:eu-repo/semantics/closedAccessen_US
dc.subjectBond Priceen_US
dc.subjectStock Priceen_US
dc.subjectExchange Rateen_US
dc.subjectSharpe Ratioen_US
dc.subjectWald Ratio Testen_US
dc.subjectLikelihood Testen_US
dc.subjectImpulse-Response Functionsen_US
dc.subjectMarkov-Switching Vector Autoregressive Modelen_US
dc.subjectRegimesen_US
dc.titleThe dynamic relationship between stock, bond and foreign exchange marketsen_US
dc.typeArticleen_US

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