European Financial Markets: What has the Global Crisis Changed?

The recent global crisis has questioned our understanding of macro and finance theory. This is especially observed in the high frequency market data such as interest rates, exchange rates and stock exchange index. Recently, Ciner (2010) has questioned the relationship between interest rates and exchange rates (before and after the Euro period) using the frequency domain analysis. His findings demonstrate the statistical significance of the relationship. Nonetheless, causality analysis does not focus on the possible comovement of the variables. The main aim of this paper is to check whether there was any comovement of these variables during 2006-2007 and the shape that the functional relationship has attained since. Hence, we use comovement wavelet analysis to decompose the relationship between interest rates, stock exchange index and exchange rates (and real effective exchange rate when needed) employing daily data. Our preliminary findings show that exchange rates and stock exchange index have experienced comovement in short horizons whereas there is hardly evidence of comovement between stock exchange index and interest rates.