THE EXCHANGE RATE AS SIGNIFICANT PREDICTOR OF MOVEMENT IN STOCK MARKET INDICES IN SOUTH ASIAN COUNTRIES: AN ECONOMETRIC ANALYSIS
Keywords:
Exchange Rate, Stock Indices, South Asian Countries, Co-Integration and VECM
Abstract
This research investigates the relationship between exchange rate and stock market prices in Asian Economies. The study relates to the comparative analysis of four South Asian countries, i.e., India, Sri Lanka, Bangladesh, and Pakistan. The study demonstrates the empirical findings on both of the variables regarding short and long-run analysis. The Exchange rate is considered as Independent variable, and the Stock Market returns as the dependent variable. Quantitative research is conducted based on Post Positivism research paradigm with flow orientated model given by Dornbusch and Fisher (1980).The monthly frequency data starting from July 2006 to June 2016 is taken from Thomson Reuter’s data sources. Econometric models like Johnsen Co-integration test, Granger causality test for Long run, and Vector Error Correction Model (VECM) is applied for short-term analysis. The empirical test results revealed that there is no long-term relationship as no co-integration for any of the stated states was found except causality witnessed for India. VECM illustrated a significant negative relationship in short run for Sri Lanka and Bangladesh. However, Exchange rates do not have a predictor tool to change the direction of stock market prices and indices in these four South Asian countries because the economic sentiments are almost same for each country.
References
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Exchange Rate Changes: International Evidence. Journal of
Business Finance & Accounting, 27(3-4), 447-467.
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Multivariate Cointegration And Error Correction Model. Review
of Financial Economics, 12(3), 301-313.
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Exchange Rate and International Portfolio Flows: Evidence from
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Prices and Exchange Rates For G-7 Countries. The Quarterly
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Dynamics. Journal of International Money and Finance, 24(7), 1031-1053.
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Walid, C., Chaker, A., Masood, O., & Fry, J. (2011). Stock Market
Volatility and Exchange Rates in Emerging Countries: A Markov-
State Switching Approach. Emerging Markets Review, 12(3), 272-292.
Wang, P., & Moore, T. (2008). Financial Market Integration for the
Transition Economies: Time-Varying Conditional Correlation
Approach. The Manchester School, 76(1), 116–133.
Zhao, H. (2010). Dynamic Relationship Between Exchange Rate and
Stock Price: Evidence from China. Research in International
Business and Finance, 24(2), 103–112.
interactions in emerging financial markets: evidence on India,
Korea, Pakistan and the Philippines. Applied financial economics, 7(1), 25-35.
Ajayi, R. A., Friedman, J., & Mehdian, S. M. (1998). On the Relationship
Between Stock Returns and Exchange Rates: Tests of Granger
Causality. Global finance journal, 9(2), 241-251.
Andersen, T. G., Bollerslev, T., Diebold, F. X., & Vega, C. (2007). Realtime
price discovery in global stock, bond and foreign exchange
markets. Journal of International Economics, 73(2), 251-277.
Aydemir, O., & Demirhan, B. (2017). The Relationship Between Stock
Prices and Exchange Rates: Evidence from MENA Countries.
In Handbook of Research on Global Enterprise Operations and
Opportunities (pp. 171-185). IGI Global.
Bailey, W., & Chung, Y. P. (1995). Exchange rate fluctuations, political
risk, and stock returns: Some evidence from an emerging
market. Journal of Financial and Quantitative Analysis, 30(4), 541-561.
Bautista, C. (2006). The Exchange Rate-Interest Differential Relationship
in Six East Asian Countries. Economics Letters, 92(1), 137–142.
Baxter, M. (1994). Real Exchange Rates and Real Interest Differentials:
Have we Missed the Business-Cycle Relationship?. Journal of
Monetary Economics, 33(1), 5-37.
Branson, W.H. (1983). Macroeconomic Determinants of Real Exchange
Risk. In Managing Foreign Exchange Risk, Cambridge
University Press, 33–74
Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic Correlation Analysis
of Financial Contagion: Evidence from Asian Markets. Journal
of International Money and finance, 26(7), 1206-1228.
Chkili, W., & Nguyen, D. K. (2014). Exchange rate movements and stock
market returns in a regime-switching environment: Evidence for
BRICS countries. Research in International Business and
Finance, 31(1), 46-56.
Dornbusch, R. & S. Fisher. (1980). Exchange Rate and The Current
Account. American Economic Review, 7(95), 960-971.
Frank, P., & Young, A. (1972). Stock Price Reaction of Multinational
Firms to Exchange Realignments, Financial. Management,
Principles of Economics, New York: McGraw Hill/Irwin winter, 1(3), 66–73.
Frankel, J. (1983). Monetary and Portfolio Balance Models of Exchange
Rate Determination, In Economic Interdependence and Flexible
Exchange Rate, Cambridge, MA: MIT Press, 95–116.
Huang, S., An, H., Gao, X., Wen, S., & Hao, X. (2017). The multiscale
impact of exchange rates on the oil-stock nexus: Evidence from
China and Russia. Applied Energy, 194(2), 667-678.
Kanas, A. (2000). Volatility Spillovers Between Stock Returns and
Exchange Rate Changes: International Evidence. Journal of
Business Finance & Accounting, 27(3-4), 447-467.
Kim, K. H. (2003). Dollar Exchange Rate and Stock Price: Evidence from
Multivariate Cointegration And Error Correction Model. Review
of Financial Economics, 12(3), 301-313.
Kodongo, O., & Ojah, K. (2012). The Dynamic Relation Between Foreign
Exchange Rate and International Portfolio Flows: Evidence from
Africa’s Capital Markets. International Review of Economics and Finance, 24, 71–87.
Kurihara, Y. (2006). The Relationship Between Exchange Rate and Stock
Prices During the Quantitative Easing Policy in Japan,
International Journal of Business, 11(4), 375-386.
Lin, C. H. (2012). The Co-movement Between Exchange Rates and Stock
Prices in the Asian Emerging Markets. International Review of
Economics & Finance, 22(1), 161-172.
Ma, C. K., & Kao, G. W. (1990). On exchange rate changes and stock price
reactions. Journal of Business Finance & Accounting, 17(3), 441-449.
Moore, T. (2007). The Effects of The Euro on Stock Markets: Evidence
from Hungary, Poland, and UK. Journal of Economic Integration 22(1), 69-90.
Muktadir-al-Mukit, D. (2013). Effects of Interest Rate and Exchange Rate
an Volatility of Market Index at Dhaka Stock Exchange. Journal
of Business and Technology (Dhaka), 7(2), 1-18.
Muhammad, N., Rasheed, A., & Husain, F. (2002). Stock Prices and
Exchange Rates: Are they Related? Evidence from South Asian
Countries. The Pakistan Development Review, 41(4), 535-550.
Nieh, C. C., & Lee, C. F. (2002). Dynamic Relationship Between Stock
Prices and Exchange Rates For G-7 Countries. The Quarterly
Review of Economics and Finance, 41(4), 477-490.
Phylaktis, K., & Ravazzolo, F. (2005). Stock Prices and Exchange Rate
Dynamics. Journal of International Money and Finance, 24(7), 1031-1053.
Qayyum, A., & Kemal, A., R. (2006). Volatility Spillover Between the
Stock Market and the Foreign Market in Pakistan. Pakistan
Institute of Development Economics, (PIDE) Working Paper 22216.
Smyth, R., & Nandha, M. (2003). Bivariate Causality Between Exchange
Rates and Stock Prices in South Asia. Applied Economics
Letters, 10(11), 699-704.
Walid, C., Chaker, A., Masood, O., & Fry, J. (2011). Stock Market
Volatility and Exchange Rates in Emerging Countries: A Markov-
State Switching Approach. Emerging Markets Review, 12(3), 272-292.
Wang, P., & Moore, T. (2008). Financial Market Integration for the
Transition Economies: Time-Varying Conditional Correlation
Approach. The Manchester School, 76(1), 116–133.
Zhao, H. (2010). Dynamic Relationship Between Exchange Rate and
Stock Price: Evidence from China. Research in International
Business and Finance, 24(2), 103–112.
Published
2017-12-15
How to Cite
Khatri, S., Kashif, D. M., & Shaikh, A. (2017). THE EXCHANGE RATE AS SIGNIFICANT PREDICTOR OF MOVEMENT IN STOCK MARKET INDICES IN SOUTH ASIAN COUNTRIES: AN ECONOMETRIC ANALYSIS. Journal of Business Strategies, 11(2), 107-123. Retrieved from http://greenwichjournals.com/index.php/businessstudies/article/view/380
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