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A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asia Flu

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Listed author(s):
  • Granger, Clive W.J.
  • Huang, Bwo-Nung
  • Yang, Chin W.

Abstract

This paper applies recently developed unit root and cointegration models to determine the appropriate Granger causality relations between stock prices and exchange rates using recent Asian flu data. Coupled with impulse response functions, it is found that data from Japan and Thailand are in agreement with this approach, so that exchange rates leads stock prices with positive correlation. On the other hand, data of Taiwan suggests the result predicted by the portfolio approach: stock prices lead exchange rates with negative correlation. Data from Indonesia, Korea, Malaysia, and the Philippines indicate strong feedback relations while that of Singapore fails to reveal any recognizable pattern

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt9bk607p6.

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Date of creation: 01 Apr 1998
Handle: RePEc:cdl:ucsdec:qt9bk607p6
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Keywords: asian flu; causality; stock prices; exchange rates;

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  1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  2. John Wei, K. C. & Liu, Yu-Jane & Yang, Chau-Chen & Chaung, Guey-Shiang, 1995. "Volatility and price change spillover effects across the developed and emerging markets," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 113-136, May.
  3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  4. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
  5. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
  6. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  7. Andrews, Donald W. K. & Lee, Inpyo & Ploberger, Werner, 1996. "Optimal changepoint tests for normal linear regression," Journal of Econometrics, Elsevier, vol. 70(1), pages 9-38, January.
  8. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  9. Kalpana Kochhar & Prakash Loungani & Mark R. Stone, 1998. "The East Asian Crisis; Macroeconomic Developments and Policy Lessons," IMF Working Papers 98/128, International Monetary Fund.
  10. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  11. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
  12. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 3-20, January.
  13. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-320, July.
  14. Boyer, Russell S, 1977. "Devaluation and Portfolio Balance," American Economic Review, American Economic Association, vol. 67(2), pages 54-63, March.
  15. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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