The role of the latest financial crisis in the long-run, short-run and Granger causal relationships between exchange rates and stock prices in Norway from 1999 to 2017.
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This thesis aims to find out what role the latest financial crisis played with respect to the long-run, short-run and Granger-causal relationships between exchange rates and stock prices in Norway from 1999 to 2017. Both daily and monthly time series data of exchange rates and stock prices, as well as 2 control variables are divided into three periods: before the crisis, during and after. By introducing 2 control variables I create a multivariate vector error correction model (VECM) which produces more robust coefficients as well as alleviates potential omitted variables bias. The VECM is also capable of giving insight into long-run and short-run dynamics between variables. Granger causality tests are run as well. The results show that the crisis had a destructive impact on the causal and short-run dynamics between exchange rates and stock prices. Stock prices and exchange rates were cointegrated before the crisis, with both short-run and long-run relationships. Granger causality was running both ways between stock prices and exchange rates. The latest financial crisis in Norway eliminated long-run and short-run relationships for its duration. The long-run relationship has been reinstated after the crisis. The same is not true of the short-run relationship and causality between stock prices and exchange rates. Short-run and causal relationships disappeared after the crisis. An important implication of this research is that stock and exchange rate markets in Norway became more efficient, which, paradoxically, might suggest that the crisis had some positive influence on the economy.
Master's thesis in Applied finance