THE RELATIONSHIP BETWEEN STOCK PRICES AND EXCHANGE RATE IN THE REPUBLIC OF CROATIA: VEC MODEL

The aim of this paper is to examine the long-run and short-run relationship between stock prices represented by CROBEX and the real effective exchange rate of Croatian Kuna in the Republic of Croatia. This relationship is analysed using vector error correction
(VEC) model, forecast error variance decomposition (FEVD) and impulse response analysis. The results showed the existence of a long-run relationship between variables. All variables in the long-run are statistically signifi cant showing that an increase in share prices will lead to the exchange rate appreciation. In the short-run changes in share prices are almost statistically insignificant. Furthermore, impulse response analysis showed that an increase in share prices will
lead to the exchange rate appreciation.