Exchange Market Pressure, Stock Prices, and Commodity Prices East of the Euro
Aim/purpose - This paper aims to examine connections between the exchange, equity, commodity and commodity markets of a set of Central and Eastern European (CEE) economies using monthly time-series data. In particular, we examine whether stock - or commodity - price changes might put pressure on these currencies to depreciate, and whether these pressures are transmitted within the region or from larger neighbors. Design/methodology/approach - This paper creates monthly indices of Ex-change Market Pressure (EMP) from 1998 to 2017 using a combination of currency depreciation, reserve losses, and changes in interest-rate differentials for the Czech Republic, Hungary, Poland, and Ukraine, Bulgaria, and Romania. After examining these indices for evidence of currency 'crises', and their components for evidence of changes in currency policy, Vector Autoregressive (VAR) methods such as Granger causality and impulse-response functions are used to examine connections between EMP, domestic and foreign stock returns, and changes in commodity prices in the first four countries listed. Findings - While EMP increased in 2008, and the degree of central banks' currency- -market interventions decreased afterward, this paper uncovers key differences among countries. In particular, the Czech Republic is relatively insulated from international transmissions, while Hungary is more susceptible to global spillovers and Poland is exposed to events originating elsewhere in the CEE region. Ukraine shows bidirectional causality between its EMP and stock indices, and finds that pressure on the hryvnia increases if commodity or oil prices decline. Research implications/limitations - This study adds to the relatively limited literature regarding this region, and highlights particular vulnerabilities for both individual countries and specific neighbors; further research is necessary to uncover the channels of transmission using economic modeling. Originality/value/contribution - This study explicitly models two major economic processes in a part of the world that is relatively rarely examined. These include events in Central and Eastern European exchange markets and central bank intervention, and also interlinkages among regional currency and equity markets, foreign equity markets, and global commodity prices. This will allow policymakers to assess integration between these countries, the rest of the European Union, and the global economy.(original abstract)
- Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66(1), 47-78.
- Bertoli, S., Gallo, G. M., & Ricchiuti, G. (2010). Exchange Market Pressure: Some caveats in empirical applications. Applied Economics, 42, 2435-2448.
- Blanchard, O., Adler, G., & de Carvalho Filho, I. (2015). Can foreign exchange intervention stem exchange rate pressures from global capital flow shocks? (Working Paper WP/15/159). Washington, D.C.: IMF.
- Cashin, P., Céspedes, L., & Sahay, R. (2002). Keynes, cocoa and copper: In search of commodity currencies (Working Paper Series WP/02/223). Washington, D.C.: IMF.
- Connolly, M., & Da Silveira, J. D. (1979). Exchange market pressure in postwar Brazil: An application of the Girton-Roper monetary model. American Economic Review, 69, 448-454.
- Eichengreen, B., Rose, A., & Wyplosz, C. (1996). Contagious currency crises: First tests. Scandinavian Journal of Economics, 98(4), 463-484.
- Federal Reserve Bank of St. Louis, FRED Database.
- Girton, L., & Roper, D. (1977). A monetary model of exchange market pressure applied to the postwar Canadian experience. The American Economic Review, 67(4), 537-548.
- Harkmann, K. (2014). Stock market contagion from Western Europe to Central and Eastern Europe during the crisis years 2008-2012. Eastern European Economics, 52(3), 55-65.
- Hegerty, S. W. (2013). Principal component measures of exchange market pressure: Comparisons with variance-weighted measures. Applied Financial Economics, 23(18), 1483-1495.
- Hegerty, S. W. (2014) Exchange market pressure and stock-price spillovers in emerging markets. Applied Economics Quarterly, 60(1), 41-74.
- Heinz, F. F., & Rusinova, D. (2015). An alternative view of exchange market pressure episodes in emerging Europe: An analysis using Extreme Value Theory (EVT) (Working Paper No. 1818). Frankfurt am Main: ECB.
- International Monetary Fund. (1998-2017). International Financial Statistics (database).
- Koseoglu, S. D., & Cevik, E. I. (2013). Testing for causality in mean and variance between the stock market and the foreign exchange market: An application to the major Central and Eastern European countries. Czech Journal of Economics and Finance (Finance a uver), 63(1), 65-86.
- Kumah, F. (2007). A Markov-switching approach to measuring exchange market pressure (Working Paper WP/07/242). Washingon, D.C.: IMF.
- Mensi, W., Beljid, M., Boubaker, A., & Managi, S. (2013). Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold. Economic Modelling, 32, 15-22.
- Patnaik, J., Felman, A., & Shah, J. (2017). An exchange market pressure measure for cross country analysis. Journal of International Money and Finance, 73(Part A), 62-77. Retrieved from https://doi.org/10.1016/j.jimonfin.2017.02.004
- Pentecost, E. J., Van Hooydonk, C., & Van Poeck, A. (2001). Measuring and estimating exchange market pressure in the EU. Journal of International Money and Finance, 20, 401-418.
- Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rates dynamics. Journal of International Money and Finance, 24(7), 1031-1053.
- Pontines, V., & Siregar, R. (2008). Fundamental pitfalls of exchange market pressure based approaches to identification of currency crises. International Review of Economics and Finance, 17(3), 345-365.
- Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48, 1-48.
- Stavárek, D. (2011). Comparison of exchange market pressure across the new part of the European Union, Emerging Markets Finance & Trade, 47(Supplement 3), 21-39.
- Tanner, E. (2000). Exchange market pressure and monetary policy: Asia and Latin America in the 1990s. IMF Staff Papers, 47, 311-333.
- Ülkü, N., & Demirci, E. (2012). Joint dynamics of foreign exchange and stock markets in emerging Europe. Journal of International Financial Markets, Institutions and Money, 22(1), 55-86.
- Van Poeck, A., Vanneste, J., & Veiner, M. (2006). Exchange market pressure in the formerly planned Central and Eastern European countries: The role of institutions. Tijdschrift voor Economie en Management, 51(3) 309-346.
- Van Poeck, A., Vanneste, J., & Veiner, M. (2007). Exchange rate regimes and exchange market pressure in the new EU member states. Journal of Common Market Studies, 45(2), 459-485.
- Weymark, D. N. (1997). Measuring exchange market pressure and intervention in interdependent economies: A two-country model. Review of International Economics, 5(1), 72-82.
- Weymark, D. N. (1998). A general approach to measuring exchange market pressure. Oxford Economic Papers, 50(1), 106-121.