The Causal Relationship between Stock Prices and Exchange Rates: Evidence from the G-7
We examine the nexus of stock prices and exchange rates for the G-7 countries by using the vector error correction model, the bounds testing methodology and linear and non-linear Granger causality methods. The empirical results substantiate that a long-run level equilibrium relationship exists among the exchange rates and stock prices for the UK and France. The results from the linear causality tests indicate significant short-run and long-run causal relations between the two financial markets. In the results of the non-linear Granger causality, there are unidirectional and bidirectional non-linear causal relations between stock prices and exchange rates in six of the G-7 countries. Therefore, the causal relations between stock prices and exchange rates are not only linear but are also non-linear.
Volume (Year): 7 (2011)
Issue (Month): 1 (January)
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