Academic journal article The International Journal of Business and Finance Research

Currency-Adjusted Stock Index Causality and Cointegration: Evidence from Intraday Data

Academic journal article The International Journal of Business and Finance Research

Currency-Adjusted Stock Index Causality and Cointegration: Evidence from Intraday Data

Article excerpt

ABSTRACT

Currency adjusted stock indices consider the impact of both stock value changes and underlying currency value changes on total wealth changes. This paper explores causality and cointegration of currency-adjusted indices using intraday data. This paper examines tick-by-tick data for seven currently available stock indexes, the Philadelphia Housing Index and the Dollar Index for the period 2002-2013. Results show cointegrating relationships between each combination of series examined. The analysis reveals a higher level of causality than found in previous research. The results show bidirectional Granger causality for every index pairwise combination examined.

JEL: F15, G11, D14

KEYWORDS: Cointegration, Stock Index, Currency-Adjusted Stock Index, Dow Jones Industrial Average

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Currency adjusted indexes control for two impacts on investor wealth. Standard stock indexes aggregate stock prices for many stocks into an index. Currency adjusted stock indexes simultaneously consider the impact of stock prices and underlying currency values. By considering both elements, currency adjusted indexes provide a measure of total portfolio value change. Many individuals live in one country but invest in another. Some authors suggest individuals do this to achieve international diversification benefits (Christoffersen, Errunza, Jacobs and Langlois, 2012; Berger, Pukthuanthong and Yang, 2011). Other motivations can drive this behavior as well. This investor behavior may be done for investment familiarity reasons, to retain an original country return option, or because of investment or tax regulations that limit the ability to relocate the funds or make such a relocation costly.

Investors living internationally but investing domestically, convert domestic investment earnings into domicile country currency for consumption. Two factors affect the purchasing power of these individuals. Purchasing power depends on performance of their investments and the exchange rate at which earnings convert to domicile country currency. Currency adjusted indices measure the combined effect of stock and currency changes on individual wealth.

Other individuals also face exposure to international markets. Individuals who use investment earnings to travel internationally, face exposure to both investment and currency risk. They wish to know the international purchasing power of their investments. Other individuals purchase items manufactured in non-domicile countries. These individuals desire to know the extent to which their domestic investments afford the international purchase. Currency adjusted indices more precisely measure the extent to which individuals achieve their goals.

This paper examines time-series properties of currency adjusted stock indices developed in Jalbert, 2012, 2014, 2015 and 2016. These earlier works make use of varying starting indexes, index observation frequencies, statistical techniques and cover different time periods. This work makes advances on the statistical sophistication of the analysis and examines a higher frequency dataset. The paper utilizes cointegration and Granger causality analyses to examine tick-by-tick trading data on a different series of indexes than examined in earlier studies. Several previous articles in this series examines close of day data. While close-of-day research is useful, news outlets regularly report index levels throughout the day. This paper provides an examination of stock indexes in a minute-by-minute setting thereby providing additional precision in the analysis.

The remainder of the paper begins with a review of the relevant literature. Next, the paper provides a description of the data and methodology used in the paper. The following section presents empirical results. The paper closes with some concluding comments.

LITERATURE REVIEW

Currency value adjusted stock indexes were first introduced by Jalbert (2012). …

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