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Bivariate causality between exchange rates and stock prices in South Asia

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  • R. Smyth
  • M. Nandha

Abstract

This article examines the relationship between exchange rates and stock prices in Bangladesh, India, Pakistan and Sri Lanka using daily data over a six-year period from 1995 to 2001. Both the Engle-Granger two-step and Johansen cointegration methods suggest that there is no long-run equilibrium relationship between these two financial variables in any of the four countries. Granger causality tests find that there is uni-directional causality running from exchange rates to stock prices in India and Sri Lanka, but in Bangladesh and Pakistan exchange rates and stock prices are independent.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 10 (2003)
Issue (Month): 11 ()
Pages: 699-704

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Handle: RePEc:taf:apeclt:v:10:y:2003:i:11:p:699-704

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References

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  1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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  3. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  4. Issam Abdalla & Victor Murinde, 1997. "Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 25-35.
  5. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(4), pages 477-490.
  6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  7. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  8. Granger, Clive W.J. & Huang, Bwo-Nung & Yang, Chin W., 1998. "A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asia Flu," University of California at San Diego, Economics Working Paper Series qt9bk607p6, Department of Economics, UC San Diego.
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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Citations

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Cited by:
  1. Golub, Alla A. & Henderson, Jason R. & Foster, Kenneth A., 2004. "Does Rural Job Growth Lead The Economy Out Of Recession?," 2004 Annual meeting, August 1-4, Denver, CO 20066, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Marcel Aloy & Mohamed Boutahar & Karine Gente & Anne Peguin-Feissolle, 2010. "Fractional integration and cointegration in stock prices and exchange rates," Working Papers halshs-00536140, HAL.
  3. Tsagkanos, Athanasios & Siriopoulos, Costas, 2013. "A long-run relationship between stock price index and exchange rate: A structural nonparametric cointegrating regression approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 106-118.
  4. Stelios D. Bekiros, 2013. "Decoupling and the Spillover Effects of the US Financial Crisis: Evidence from the BRIC Markets," Working Paper Series 21_13, The Rimini Centre for Economic Analysis.
  5. Huzaimi Hussain & Venus Khim-Sen Liew, 2004. "Causal Relationships Between Exchange Rates And Stock Prices In Malaysia And Thailand During The 1997 Currency Crisis Turmoil," International Finance 0405015, EconWPA.
  6. Yu Hsing & A. M. M. Jamal & Wen-jen Hsieh, 2009. "Application of the monetary policy function to output fluctuations in Bangladesh," Economics Bulletin, AccessEcon, vol. 29(3), pages 2113-2122.
  7. Moore, Tomoe & Wang, Ping, 2007. "Volatility in stock returns for new EU member states: Markov regime switching model," International Review of Financial Analysis, Elsevier, vol. 16(3), pages 282-292.
  8. Moore, Tomoe & Wang, Ping, 2014. "Dynamic linkage between real exchange rates and stock prices: Evidence from developed and emerging Asian markets," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 1-11.
  9. Abdul Qayyum & A. R. Kemal, 2006. "Volatility Spillover between the Stock Market and the Foreign Market in Pakistan," PIDE-Working Papers 2006:7, Pakistan Institute of Development Economics.
  10. Christos Kollias & Nikolaos Mylonidis & Suzanna-Maria Paleologou, 2012. "The nexus between exchange rates and stock markets: evidence from the euro-dollar rate and composite European stock indices using rolling analysis," Journal of Economics and Finance, Springer, vol. 36(1), pages 136-147, January.
  11. De Gooijer, Jan G. & Sivarajasingham, Selliah, 2008. "Parametric and nonparametric Granger causality testing: Linkages between international stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(11), pages 2547-2560.
  12. Tsai, I-Chun, 2012. "The relationship between stock price index and exchange rate in Asian markets: A quantile regression approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 609-621.
  13. Manish Kumar, 2009. "A Bivariate Linear and Nonlinear Causality between Stock Prices and Exchange Rates," Economics Bulletin, AccessEcon, vol. 29(4), pages 2884-2895.
  14. Wang, Ping & Moore, Tomoe, 2009. "Sudden changes in volatility: The case of five central European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 33-46, February.
  15. Nukhet Dogan & Yeliz Yalcin, 2007. "The effects of the exchange rate movements on the Istanbul stock exchange," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 39-46, January.
  16. Abdulnasser Hatemi-J & Eduardo Roca, 2005. "Exchange rates and stock prices interaction during good and bad times: evidence from the ASEAN4 countries," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 539-546.
  17. Tomoe Moore, 2007. "Has entry to the European Union altered the dynamic links of stock returns for the emerging markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(17), pages 1431-1446.
  18. repec:ebl:ecbull:v:30:y:2010:i:1:p:115-129 is not listed on IDEAS

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