On the Heterogeneous and Time-Varying Relationship Between Stock Returns and Exchange Rates: Using a Panel Smooth Transition Regression Model

Abstract: This paper investigates the heterogeneous and time-varying relationship between stock returns and exchange rates for a panel of 19 countries using a panel smooth transition regression model and evaluates the role of the current account balance. Panel unit root tests indicate that stock market price indices and real effective exchange rates are non-stationary. The Pedroni cointegration tests suggest there is a cointegrating relationship between the variables for the select panel of countries. The homogeneity tests strongly reject the hypothesis of homogeneity/linearity in the regression coefficients allowing the use of a PTSR model. Country-specific regression coefficients are then estimated that display the extent of heterogeneity in the relationship.