Comment on Johnson and Soenen (2004): The US stock market and the international value of the US dollar

Is there a relationship between the performance of US equity markets and the value of the US dollar? The question is of practical and regulatory significance. Previous attempts to answer the question relied upon on the lagged-causality approach of Clive Granger and his coauthors. Given that financial markets are efficient, most of the correlation would be undetectable by such methods. In groundbreaking work, Johnson and Soenen (2004) used an estimator by Geweke (1982) that allows for contemporaneous or instantaneous effects, and found that there was always and everywhere an instantaneous link between the US equity and currency markets. Given the importance of Johnson and Soenen's results, we attempted to replicate their study. We argue that Johnson and Soenen's results hinge on a simple substitution error. After recalculation, we find little evidence of consistent instantaneous correlation between returns in the US equity markets and the value of the US dollar.