US stock prices and the dollar: An empirical analysis

Since the start of the floating currency era in the mid 1970s, the U.S. has become the recipient of increasing amounts of liquid capital inflows. The purpose of this paper is to investigate the possible links that exists between the U.S. stock prices (indices), flows of foreign portfolio capital, and the foreign exchange value of the U.S. dollar over the period of 1975-1997. We make use of the technique of cointegration. Based on the available quarterly data, the results indicate that net capital inflows are cointegrated with two indices of the NYSE but that no cointegration is found with respect to the U.S. dollar.