An Empirical Investigation of the Joint Efficiency of the U.S. Stock and Foreign Exchange Markets

Abstract

The stock market and foreign exchange rate markets are interrelated due to the similar fundamentals which determine the movement in the two respective markets. Applying the efficient market hypothesis, these two markets should be jointly efficient. If the markets are jointly efficient, then no long term comovement should exist between a stock market index and a foreign exchange rate index. The existence of a long term relation is tested by use ofcointegration tests and common serial correlation feature tests. If no cointegration exists and if no common serial correlation feature exists, then we would not be rejecting joint efficiency of the two markets. Using the S&P 500 Stock index, the Wilshire 5000 index, and the NASDAQ index to proxy stock market indexes and using a trade weighted foreign exchange rate index for the United States, the empirical results of the cointegration and common feature tests support the joint efficiency of the two m.arkets. (G14, Gl5, F3)