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The Causal Relationship between Stock Prices and Exchange Rates: Evidence from the G-7

Author

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  • Shyh-Wei Chen

    () (Department of International Trade, Chung Yuan Christian University, Taiwan)

  • Tzu-Chun Chen

    (Taiwan Research Institute, Taiwan)

Abstract

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.

Suggested Citation

  • Shyh-Wei Chen & Tzu-Chun Chen, 2011. "The Causal Relationship between Stock Prices and Exchange Rates: Evidence from the G-7," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 7(1), pages 101-133, January.
  • Handle: RePEc:jec:journl:v:7:y:2011:i:1:p:101-133
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    More about this item

    Keywords

    exchange rate; stock price; cointegration; causality;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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