IDEAS home Printed from https://ideas.repec.org/a/pid/journl/v41y2002i4p535-550.html
   My bibliography  Save this article

Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries

Author

Listed:
  • Naeem Muhammad

    (Department of Economics and Finance, Institute of Business Administration, Karachi University Campus, Karachi.)

  • Abdul Rasheed

    (Applied Economics Research Centre, Karachi University, Karachi.)

Abstract

The issue of whether stock prices and exchange rates are related or not has received considerable attention after the East Asian crisis. During the crisis the countries affected saw turmoil in both currency and stock markets. If stock prices and exchange rates are related and the causation runs from exchange rates to stock prices, then the crisis in the stock markets can be prevented by controlling the exchange rates. Moreover, developing countries can exploit such a link to attract/stimulate foreign portfolio investment in their own countries. Similarly, if the causation runs from stock prices to exchange rates then authorities can focus on domestic economic policies to stabilise the stock market. If the two markets/prices are related then investors can use this information to predict the behaviour of one market using the information on other market.1 Most of the empirical literature that has examined the stock prices-exchange rate relationship has focused on examining this relationship for the developed countries with very little attention on the developing countries. The results of these studies are, however, inconclusive. Some studies have found a significant positive relationship between stock prices and exchange rates [for instance Smith (1992); Solnik (1987) and Aggarwal (1981)] while others have reported a significant negative relationship between the two [e.g., Soenen and Hennigar (1998)]. On the other hand, there are some studies that have found very weak or no association between stock prices and exchange rates [for instance, Franck and Young (1972); Bartov and Bodnor (1994)]. On the issue of causation, the evidence is also mixed. Some studies [for instance, Abdalla and Murinde (1997)] have found causation runs from exchange rates to stock prices while other reported a reverse causation [e.g., Ajayi and

Suggested Citation

  • Naeem Muhammad & Abdul Rasheed, 2002. "Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 535-550.
  • Handle: RePEc:pid:journl:v:41:y:2002:i:4:p:535-550
    as

    Download full text from publisher

    File URL: http://www.pide.org.pk/pdf/PDR/2002/Volume4/535-550.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354.
    3. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
    4. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-397, August.
    5. 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.
    6. Ajayi, Richard A & Mougoue, Mbodja, 1996. "On the Dynamic Relation between Stock Prices and Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, Summer.
    7. 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.
    8. Smith, C. E., 1992. "Stock markets and the exchange rate: A multi-country approach," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 607-629.
    9. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    11. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    13. Li Lian Ong & H. Y. Izan, 1999. "Stocks and currencies: are they related?," Applied Financial Economics, Taylor & Francis Journals, vol. 9(5), pages 523-532.
    14. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-149, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:41:y:2002:i:4:p:535-550. 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: (Khurram Iqbal). General contact details of provider: http://edirc.repec.org/data/pideipk.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.