IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Linkages between Thai stock and foreign exchange markets under the floating regime

Listed author(s):
  • Komain Jiranyakul

Purpose - The purpose of the present study is to directly examine the relationship between bilateral exchange rate and stock market index in a bivariate framework during the period of the floating exchange rate regime in Thailand. Design/methodology/approach - The monthly data used in this study are the stock market index or stock prices from the Stock Exchange of Thailand, and the nominal bilateral exchange rate in terms of baht per US dollar from the Bank of Thailand. The period covers July 1997 to June 2010 with 156 observations. This is the period that the country switched from fixed to floating exchange rate regime. The stock market return is calculated by the percentage change of stock market index (or stock prices) while the exchange rate return is the percentage change of the nominal bilateral exchange rate. Three estimation methods are used to capture the interaction between stock and foreign exchange markets: bounds testing for cointegration, non-causality test, and the two-step approach with a bivariate GARCH model and Granger causality test. Findings - The results of the present study show that bounds testing for cointegration does not detect the long-run relationship between stock prices and exchange rate. In addition, the non-causality test fails the diagnostic test for multivariate normality in the residuals of the estimated VAR model. However, the two-step approach adequately detects the linkages between the stock and foreign exchange markets. It is found that there exists positive unidirectional causality running from stock market return to exchange rate return. The exchange rate risk causes stock return to fall as expected. Moreover, there are bidirectional causal relations between stock market risk and exchange rate risk, but in different directions. Research limitations/implications - Since a rising trend in the risk in the foreign exchange market causes stock return to fall, both domestic and foreign investors should be aware of the risk or uncertainty in the foreign exchange market because it can cause their portfolio return to fall. For policymakers, reducing exchange rate risk cannot be done without the associated costs from a rising risk in the stock market. Originality/value - This study provides an evidence of volatility (or risk) spillovers in stock and foreign exchange markets. In addition, the risk in foreign exchange market that adversely affects return in the stock market is an expected phenomenon under the floating exchange rate regime.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.emeraldinsight.com/10.1108/17576381211279280?utm_campaign=RePEc&WT.mc_id=RePEc
Download Restriction: Access to full text is restricted to subscribers

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

Volume (Year): 4 (2012)
Issue (Month): 4 (November)
Pages: 305-319

as
in new window

Handle: RePEc:eme:jfeppp:v:4:y:2012:i:4:p:305-319
Contact details of provider: Web page: http://www.emeraldinsight.com

Order Information: Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Web: http://www.emeraldinsight.com/jfep.htm Email:


No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:v:4:y:2012:i:4:p:305-319. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.