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Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries

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  • Shyh-Wei Chen
  • Tzu-Chun Chen
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    Abstract

    Purpose – The purpose of this paper is to examine the relationship between stock prices and exchange rates in 12 OECD countries. Design/methodology/approach – The authors examine the nexus of stock prices and exchange rates for 12 OECD countries by using the vector error correction model, the bounds testing methodology and linear and non-linear Granger causality methods. Findings – The empirical results substantiate that a long-run level equilibrium relationship among the exchange rates and stock prices exists in only seven out of twelve countries. The results of the linear causality tests indicate that significant short-run and long-run causal relationships exist between the two financial markets. The results of the tests for non-linear Granger causality suggest that unidirectional and bidirectional non-linear causal relationships exist between stock prices and exchange rates among these OECD countries. Originality/value – The findings from this paper suggest the causal relationships between stock prices and exchange rates are not only linear, but also non-linear. JEL classification: G1, F31, C32

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

    Volume (Year): 39 (2012)
    Issue (Month): 2 (May)
    Pages: 231-259

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    Handle: RePEc:eme:jespps:v:39:y:2012:i:2:p:231-259

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    Related research

    Keywords: Causality; Exchange rates; Non-linear; Stock prices;

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    Cited by:
    1. Bahmani-Oskooee, Mohsen & Harvey, Hanafiah & Hegerty, Scott W., 2014. "Industry trade and exchange-rate fluctuations: Evidence from the U.S. and Chile," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 619-626.
    2. Mohsen Bahmani-Oskooee & Sahar Bahmani, 2014. "Monetary Uncertainty and Demand for Money in Korea," Asian Economic and Financial Review, Asian Economic and Social Society, Asian Economic and Social Society, vol. 4(3), pages 317-324, March.

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