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Relationship between Exchange Rate and Equity Prices in an Emerging Market: A Continuous Wavelet-based Analysis for Bangladesh

Author

Listed:
  • Aviral Kumar Tiwari

    (Rajagiri Business School, Rajagiri Valley Campus, Kochi, India and Montpellier Business School, Montpellier, France)

  • Anisul M. Islam

    (College of Business, University of Houston (Downtown) Houston, Texas, U.S.A.)

  • Md. Mohibul Islam

    (ULAB School of Business, University of Liberal Arts Bangladesh Dhaka, Bangladesh)

Abstract

This research empirically examines the relationship between the exchange rate and stock prices by utilizing a relatively novel and non-traditional technique known as the continuous wavelet approach, which involves the continuous wavelet power spectrum, cross-wavelet transform, and cross-wavelet coherency. We employ monthly time-series data from the period 1986m09 to 2014m07 for a total of 334 monthly observations on Bangladesh. The empirical results strongly support the traditional hypothesis that the exchange rate leads (causes) stock prices compared to the alternative portfolio-based hypothesis. The implication of this finding is that policy makers need to be extra careful in managing the local exchange rate and to consider any possible effects of policy actions in the foreign exchange market on the stock market in order to avoid undesirable consequences.

Suggested Citation

  • Aviral Kumar Tiwari & Anisul M. Islam & Md. Mohibul Islam, 2019. "Relationship between Exchange Rate and Equity Prices in an Emerging Market: A Continuous Wavelet-based Analysis for Bangladesh," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(2), pages 165-193, September.
    • Handle: RePEc:ijb:journl:v:18:y:2019:i:2:p:165-193
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    References listed on IDEAS

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    More about this item

    Keywords

    exchange rate; stock prices; wavelet coherency; Bangladesh;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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