A Granger causality analysis between stock prices and exchange rates: evidence from four countries

Phoong, Seuk Yen

Abstract

This study investigates predictive causality between stock prices and exchange rates over the period of January 2005 to May 2020 in Malaysia, Singapore, China, and USA. The methodology applied in this study allows for structural changes during the global financial crisis, as past studies have shown that tests can be biased towards non-rejection if structural breaks are not accounted for. Thence, Gregory and Hansen cointegration and Granger causality tests are implemented in this study. Results revealed that unidirectional Granger causality relations are established in Malaysia, the US, and Singapore. However, signs for causal effects differ even though two markets have the same unidirectional Granger causality relation. Additionally, stock prices and exchange rates are found to be cointegrated in the US and Singapore. Meanwhile, there is no causal effect between stock prices and the exchange rate in China, for both the short-run and long-run periods. Copyright 2023 Inderscience Enterprises Ltd.

References

Bahmani-Oskooee, M., & Saha, S. (2015). On the relation between stock prices and exchange rates: a review article. Journal of Economic Studies, 42(4), 707–732. https://doi.org/10.1108/JES-03-2015-0043

Chirwa, T. G., & Odhiambo, N. M. (2019). The nexus between key macroeconomic determinants and economic growth in Zambia: a dynamic multivariate Granger causality linkage. Empirical Economics, 57(1), 301–327. https://doi.org/10.1007/s00181-018-1439-2

Granger, C. W. J., Huangb, B.-N., & Yang, C.-W. (2000). A bivariate causality between stock prices and exchange rates: Evidence from recent Asianflu. Quarterly Review of Economics and Finance, 40(3), 337–354. https://doi.org/10.1016/s1062-9769(00)00042-9

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616

Phoong, S. W., Phoong, S. Y., & Phoong, K. H. (2020). Analysis of structural changes in financial datasets using the breakpoint test and the markov switching model. Symmetry, 12(3). https://doi.org/10.3390/sym12030401

Vygodina, A. V. (2006). Effects of size and international exposure of the US firms on the relationship between stock prices and exchange rates. Global Finance Journal, 17(2), 214–223. https://doi.org/10.1016/j.gfj.2006.05.001

Xie, Z., Chen, S.-W., & Wu, A.-C. (2020). The foreign exchange and stock market nexus: New international evidence. International Review of Economics and Finance, 67, 240–266. https://doi.org/10.1016/j.iref.2020.01.001

Yang, Z., Tu, A. H., & Zeng, Y. (2014). Dynamic linkages between Asian stock prices and exchange rates: New evidence from causality in quantiles. Applied Economics, 46(11), 1184–1201. https://doi.org/10.1080/00036846.2013.868590