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Co-Integration between Stock Prices and Exchange Rate of Selected SAARC Countries: An Empirical Study

Author

Listed:
  • Channa, Sumaira

    () (MS Scholar, Department of Business Administration, Sukkur Institute of Business Administration)

  • Memon, Pervaiz Ahmed

    () (Assistant Professor, Department of Business Administration, Sukkur Institute of Business Administration)

  • Kalhoro, Muhammad Ramzan

    () (Research Assistant, Office of Research, Innovation & Commercialization – ORIC, Sukkur Institute of Business Administration)

Abstract

This study examines the relationship between stock prices and exchange rates of three selected SAARC countries including Pakistan, India and Srilanka; using monthly data from period of January 1999 to December 2015. This study employs statistical techniques of Augmented Dickey Fuller (ADF), Phillips Perron (PP), unit root tests, and Johansen’s Co-integration test to determine long run equilibrium association ship between stock price indices and exchange rates. The study finds out no Co-integration between the two variables, hence no long run association is existing between them. This finding implies that investors in these markets are having more opportunities for diversifying their portfolios. However, using Granger Causality and impulse response tests, it finds significant short-run feedback effects, as stock prices Granger cause exchange rates in case of Pakistan and unidirectional causality flows from exchange rates to stock prices in case of Srilanka but no proof of causality running in either direction in case of India. Hence the findings for Pakistan and Srilanka have crucial policy implications.

Suggested Citation

  • Channa, Sumaira & Memon, Pervaiz Ahmed & Kalhoro, Muhammad Ramzan, 2016. "Co-Integration between Stock Prices and Exchange Rate of Selected SAARC Countries: An Empirical Study," Sukkur IBA Journal of Management and Business, Sukkur IBA University, vol. 3(1), pages 82-98, April.
  • Handle: RePEc:ris:ibajmb:0022
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    File URL: https://doi.org/10.30537/sijmb.v3i1.138
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    More about this item

    Keywords

    Exchange rate; Stock price indices; Johansen Co-integration; Granger Causality; Impulse Response; SAARC countries;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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