Time varying causality between stock market and exchange rate: evidence from Turkey, Japan and England

Abstract

In this study, the relationship between exchange rates and stock market indices in Turkey, Japan and England was analysed by using the time varying causality test. First, by the Kapetanios unit root test that allows determining structural breaks endogenously and more than two breaks, stationary levels and break numbers of series were identified. Second, based on the belief that the result of especially long-term causality can have different consequences in different periods due to economic and political crises, a time-varying causality test with bootstrap developed by R. Scott Hacker and Abdulnasser Hatemi-J was used. As a result of the study using monthly data spanning the period of January 1990 to April 2013, there existed two-way causality for the three countries in periods when local and global crises were occurring.