Dynamics of currency–stock market linkages: Conditional correlations, structural changes, and statistical anomalies

Aim/purpose – The study aimed to analyze the interrelationships between the stock market and the currency market in selected G10 countries – Germany, Japan, Canada, Sweden, Switzerland, and the United Kingdom – with particular emphasis on the association between local and global macroeconomic shocks and market dynamics.

Design/methodology/approach – The analysis was based on daily data from the Refinitiv Datastream (formerly Thomson Reuters Datastream) and employed DCC-GARCH models to estimate conditional correlations, while structural breaks were identified using the Bai–Perron test and anomalies were detected using the CAPA algorithm.

Findings – The results indicate that the relationship between exchange rates and domestic stock market indices is neither constant nor uniform; its intensity and direction depend strongly on the specific characteristics of each economy and the type of shock. In some countries, such as Germany and Japan, interdependence increased during periods of financial stress, whereas in Sweden the relationship remained weak and unstable. The anomaly analysis showed that the strength and detectability of anomalies depend on the economy and the chosen time horizon. Furthermore, the findings suggest that a flexible exchange rate does not always exert a stabilizing effect in periods of heightened uncertainty; it may even reinforce the interdependence between stock market returns and exchange rate returns.

Research implications/limitations – The paper underscores the importance of a contextual approach to analyzing market linkages and identifying turning points and anomalies in correlation dynamics.

Originality/value/contribution – The study contributes to the literature by providing a detailed, country-specific analysis of stock–currency market linkages under various macroeconomic shocks and by demonstrating the nuanced role of flexible exchange rates in market interdependence, highlighting new directions for future research on shock transmission mechanisms within financial systems.