The dynamic relationship between stock market indexes and foreign exchange

This empirical study analyses the dynamic relationship between the FTSE 100 Index and the Euro STOXX 50 Index and the USD/EUR and USD/GBP exchange rates, from January 2007 to April 2017. The Johansen co-integration tests suggest that these variables have a long-term relationship. The Granger causality test was conducted through the use of VECM equations, showing that the FTSE 100 and the Euro STOXX 50 Index both have a causal feedback relationship. A unidirectional relationship was found between the FTSE 100 Index stock prices and the USD/EUR exchange rate. The presence of a unidirectional relationship between the USD/GBP exchange rate and FTSE 100 and Euro STOXX 50 Index stock prices was also detected.