Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries
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.
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Volume (Year): 39 (2012)
Issue (Month): 2 (May)
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