article · Journal of International Financial Trends
An examination of Asia-Pacific OECD economies demonstrates that stock market prices and exchange rates interact primarily through financial and balance sheet channels rather than traditional trade competitiveness. Currency depreciation and interest rate increases harm equity valuations through severe contractionary balance sheet effects, directly disproving the conventional flow-oriented hypothesis. Conversely, equity market growth and positive investor sentiment attract portfolio capital inflows that trigger rapid currency appreciation, providing strong evidence for the portfolio balance hypothesis. Across these markets, asset market mechanisms and sentiment-driven capital movements have superseded traditional goods trade channels. Furthermore, regional financial markets react substantially more aggressively to negative macroeconomic shocks during periods of market stress than to positive developments during economic expansions, highlighting the inadequacy of static linear assumptions.
Traditional economic models assume that currency depreciation helps economies through trade competitiveness. This research reveals that financial integration reverses this effect, as falling currencies and higher interest rates strain corporate balance sheets. Understanding that asset flows dictate currency values helps central banks and regulators recognise the limitations of interest rate defences and better safeguard financial stability during periods of market stress.
The abstract does not indicate an application pathway, as the research is directed entirely at macroeconomic policy frameworks, central banks, and financial market regulators.
AI-generated from the published abstract. Always read the original work before citing.
This study explores the dynamic, multi-horizon linkages between stock market prices and exchange rates across Asia-Pacific OECD countries to test the competing validity of the Flow-Oriented and Portfolio Balance hypotheses. Employing a wide-ranging econometric framework that integrates the Panel CS-ARDL model with Breitung-Candelon frequency-domain causality, Time-Varying Parameter Panel VAR (TVP-P-VAR), and asymmetric panel ARDL techniques, the research captures long-run equilibria, regime-dependent shifts, and structural asymmetries. The empirical findings decisively invalidate the traditional flow-oriented trade competitiveness perspective, revealing instead that currency depreciation and interest rate hikes inflict severe contractionary damage on equity valuations through a dominant Balance Sheet effect. As a result, asset market channels and sentiment-driven capital flows in Asia-Pacific countries with financial integration operate as stronger forces than traditional goods market mechanisms. On the contrary, the results strongly validate the stock-oriented Portfolio Balance model, demonstrating that bullish market sentiment and equity market expansions drive rapid, high-frequency currency appreciation via portfolio capital inflows. Asymmetric and time-varying estimations reveal that regional financial markets react significantly more aggressively to negative macro-financial shocks during stress regimes than to positive stimuli during economic expansions. These economies differ significantly in exchange rate arrangements, export dependence, capital market sophistication, institutional quality, and openness to international investment. The study contributed to the financial market literature by establishing that asset market channels and sentiment-driven capital flows have superseded traditional goods market mechanisms in financially integrated economies. Central banks should be positioned to understand both the limits of interest rate defenses and the need to handle asymmetric volatility. The findings of the research have broad implications that require policymakers, central banks and financial regulators to develop and execute policies which will achieve sustainable financial market growth. These insights urge policymakers to abandon static linear assumptions and adopt dynamic, macro-financial risk management frameworks to safeguard regional financial stability.
This page summarises published work. The authoritative version sits with the publisher.
DOI: 10.55578/jift.2608.011
Is something wrong with this record? Report it or request removal.
Discussion
Have you built on this work, tried to replicate it, or seen it applied in practice? Share what you know. Verified researchers and MARATTO™ domain experts can open a discussion, and any member can reply. Contributions are reviewed before they appear.
No discussion yet. Open the first thread.
New to MARATTO™? Create a free account.
