Time varying correlations and causalities between stock and foreign exchange markets: Evidence from China, Japan and Korea

This paper examines the time-varying relationship between the stock and the foreign exchange markets for China, Japan and Korea for the period July 2005 to November 2013. The cross-market relationship within each country differs among the three countries and varies over time. There is no evidence of a significant and consistent pattern of causality between the two market segments in China for the whole sample. However, there is some evidence of causality, mostly from the foreign exchange to the stock market during major crisis periods. For Japan, we find a significant causality from the foreign exchange to the stock market for most of the sample period. During the periods of stock market turmoil (2007 and 2011) in Japan, however, the stock market drives the foreign exchange market. In contrast, there is a strong and consistent causality from the stock to the foreign exchange market in Korea throughout the sample except for 2009.