Comparing the performance of relative stock return differential and real exchange rate in two financial crises

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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  • Douglas K. T. Wong
  • Kui-Wai Li

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Original languageEnglish
Pages (from-to)137-150
Journal / PublicationApplied Financial Economics
Issue number1-2
Publication statusPublished - Jan 2010


This article uses the Dynamic Conditional Correlation (DCC) model and the data from 11 economies to examine the inter-temporal interactions between stock return differential relative to the US and real exchange rate in the two financial crises of 1997 and 2008. The theoretical model suggests that relative stock return differential and real exchange rate that contain both permanent and temporary components are negatively correlated with each other. Evidence shows that sharp and rapid changes in conditional correlation occurred during the two financial crises. This study provides strong evidence in supporting the stochastic relationship between relative stock prices and real exchange rates, and exchange rate stability becomes crucial in a financial crisis. © 2010 Taylor & Francis.