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Exchange Rate And Stock Price Interaction In Major Asian Markets: Evidence For Individual Countries And Panels Allowing For Structural Breaks

Author

Listed:
  • HOOI HOOI LEAN

    () (Economics Program, School of Social Sciences, Universiti Sains Malaysia, Malaysia)

  • PARESH NARAYAN

    (School of Accounting, Finance and Economics, Deakin University, Australia)

  • RUSSELL SMYTH

    (Department of Economics, Monash University, Australia)

Abstract

This article examines the relationship between exchange rates and stock prices in eight Asian countries. We test for cointegration and Granger causality for both individual countries using the Gregory and Hansen cointegration test that accommodates a structural break in the cointegrating vector, and for a panel using the Westerlund panel Lagrange multiplier (LM) cointegration test that allows for multiple structural breaks in the level of the individual cointegrating equations. Our results for individual countries suggest that the only country for which exchange rates and stock prices are cointegrated over the entire period is Korea where there is a weak long-run unidirectional Granger causality running from exchange rates to stock prices. Employing the panel LM cointegration test with multiple structural breaks, we find that exchange rates and stock prices are not cointegrated. We conclude that for the eight Asian countries, exchange rates and stock prices primarily have only a contemporaneous effect on each other that is reflected in the short-run intertemporal comovements between these financial variables.

Suggested Citation

  • Hooi Hooi Lean & Paresh Narayan & Russell Smyth, 2011. "Exchange Rate And Stock Price Interaction In Major Asian Markets: Evidence For Individual Countries And Panels Allowing For Structural Breaks," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(02), pages 255-277.
  • Handle: RePEc:wsi:serxxx:v:56:y:2011:i:02:n:s0217590811004250
    DOI: 10.1142/S0217590811004250
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    References listed on IDEAS

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    1. Ethan Kaplan & Dani Rodrik, 2002. "Did the Malaysian Capital Controls Work?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 393-440, National Bureau of Economic Research, Inc.
    2. Junsoo Lee & Mark C. Strazicich, 2013. "Minimum LM unit root test with one structural break," Economics Bulletin, AccessEcon, vol. 33(4), pages 2483-2492.
    3. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486, December.
    4. Bala Ramasamy & Matthew C.H. Yeung, 2005. "The Causality Between Stock Returns And Exchange Rates: Revisited," Australian Economic Papers, Wiley Blackwell, vol. 44(2), pages 162-169, June.
    5. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Mu-Shun Wang, 2013. "An Investigation of the Feldstein–Horioka Puzzle for the Association of Southeast Asian Nations Economies," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 46(4), pages 424-443, December.
    2. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    3. Mu-Shun Wang, 2013. "An Investigation of the Feldstein–Horioka Puzzle for the Association of Southeast Asian Nations Economies," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 46(4), pages /, December.
    4. Adewumi Otonne & Terzungwe Usar & Adebayo Adereni, 2018. "Real Exchange Returns and Real Stock Price Returns in Nigeria: An Econometrics Analysis of the Direction of Causality," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 4(5), pages 131-144, 05-2018.

    More about this item

    Keywords

    Exchange rates; stock prices; structural break; panel; F31; G15;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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