Journal Article

Impact of Financial Market uncertainty and Financial Crises on Dynamic Stock—Foreign Exchange Market Correlations: A New Perspective

Al.Al. Hadood, Abobaker, Athari, Seyed Alireza, Gökmenoğlu, Korhan K., Irani, Farid

2025

Overview

This study explores how uncertainties in domestic financial markets, including stocks, bonds, and exchange rates, as well as global crises like the subprime mortgage and European sovereign debt crises, affect the dynamic correlation between the Australian stock market index (ASX 300) and foreign exchange rates. Using quantile regression estimation and analyzing high-frequency data from 1999 to 2021, we uncover distinct relationships influenced by currency-specific uncertainties. Our findings reveal that Australian stock market concerns impact co-movements with financial instruments, showing different effects on the correlations with the Euro, British Pound, US Dollar, Japanese Yen, and Chinese Yuan. Surprisingly, uncertainties in the Australian bond market have a negative impact on co-movement with the Euro and British Pound but a positive impact with the US Dollar, Japanese Yen, and Chinese Yuan. Additionally, we observe that volatility in the Australian currency’s exchange rate with various currencies positively influences dynamic co-movements. However, the strength of this connection varies based on the volatility of the Australian dollar against the Japanese Yen. Global financial crises, especially the subprime mortgage crisis, significantly impact dynamic co-movements, supporting both Flow and Stock-oriented theories. In summary, our research sheds light on the diverse impacts of domestic financial market uncertainties on co-movement, providing valuable insights for portfolio managers and foreign investors aiming to understand the intricate relationship between the Australian stock market and exchange rates. JEL Classification: C32, F31, G01, G15 Plain language summary How financial market uncertainty and crises affect the relationship between stocks and foreign exchange Study focuses on stock market and foreign exchange rate correlation under market uncertainties. Utilizes quantile regression to analyze impact of domestic financial factors and global crises. Uncertainties in Australian stock market negatively influence correlation. Uncertainties in Australian bond market negatively affect Euro and British Pound, but positively impact US Dollar, Japanese Yen, and Chinese Yuan. Australian exchange rate uncertainties positively impact correlation with Euro, US Dollar, British Pound, and Chinese Yuan; negatively with Japanese Yen. Results support both Flow and Stock-oriented models, revealing varied effects of domestic financial uncertainties. Global financial crises, particularly subprime mortgage crisis, negatively influence dynamic co-movement. Validity of Stock-oriented model confirmed, indicating uniform negative effects of global uncertainties on dynamic correlation.

• Publisher: SAGE Publications,SAGE PUBLICATIONS, INC,SAGE Publishing
• Subject: American dollar / Bond markets / Bonds / Classification / Currency / Economic crisis / Emotions / Euro / Financial market / Foreign exchange / Foreign exchange markets / Foreign exchange rates / Foreign investment / International finance / Investors / Money / Mortgages / National debt / Portfolios / Renminbi / Securities markets / Stock exchanges / Stocks / Subprime lending / Uncertainty / Volatility