Exchange Rate Movements, Stock Prices and Volatility in the Caribbean and Latin America

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Abstract

We analyse the interrelationship between stock prices and exchange rates in the only two Caribbean countries with stock market and floating exchange rates: Jamaica and Trinidad and Tobago. We also study the same four Latin American countries as in Diamandis and Drakos (2011). Using their model, our results show a very mild relationship between both variables in Jamaica, Trinidad and Tobago, Argentina and Brazil, but we cannot find any relationship in the other countries as in Diamantis and Drakos (2011). However, when we extend their model including a GARCH component to examine the impact of volatility, our results changed drastically: stock prices significantly impacted the exchange rate in the tranquil sub-period and the full period for Jamaica, over all three periods for Trinidad and Tobago and in the tranquil period for Argentina, Mexico and Chile. This shows the importance of incorporating volatility explicitly in the model. Our results have the policy implications that governments in the previous countries should try to prevent a currency crisis by stimulating economic growth and the expansion of the stock market to attract capital inflow as in Lin (2012).

Keywords: exchange rates, stock prices, volatility.

JEL Classifications: F31, G01

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Author Biographies

Andre Yone Haughton, University of the West Indies Mona

Assistant Professor at University of West Indies Mona

Emma M. Iglesias, University of A Coruna

BSc in Economics (1997, University of A Coruña, Spain) MSc in Economics and Econometrics (1999, University of Exeter, UK) PhD in Economics (2002, Cardiff University, UK) Currently working at Department of Economics at University of A Coruña. Associate Professor.

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Published

2017-04-03

How to Cite

Haughton, A. Y., & Iglesias, E. M. (2017). Exchange Rate Movements, Stock Prices and Volatility in the Caribbean and Latin America. International Journal of Economics and Financial Issues, 7(2), 437–447. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/4104

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