DYNAMIC LINKAGES BETWEEN EXCHANGE RATES AND STOCK PRICES: EVIDENCE FROM EAST ASIAN MARKETS

Abstract This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.

[1]  S. Fischer,et al.  Exchange Rates and the Current Account , 1980 .

[2]  D. Romer,et al.  Trade and Growth in East Asian Countries: Cause and Effect? , 1996 .

[3]  George Allayannis,et al.  The Use of Foreign Currency Derivatives and Firm Market Value , 1998 .

[4]  Daily Cross-Border Equity Flows: Pushed or Pulled? , 2002 .

[5]  René M. Stulz,et al.  Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan , 1995 .

[6]  S. Johansen.  Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models , 1991 .

[7]  C. Sims.  MACROECONOMICS AND REALITY , 1977 .

[8]  Philippe Jorion,et al.  The Pricing of Exchange Rate Risk in the Stock Market , 1991, Journal of Financial and Quantitative Analysis.

[9]  Sergio L. Schmukler,et al.  What Triggers Market Jitters? A Chronicle of the Asian Crisis , 1999 .

[10]  C. Granger.  Some recent development in a concept of causality , 1988 .

[11]  V. Murinde,et al.  Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines , 1997 .

[12]  Campbell R. Harvey,et al.  Foreign Speculators and Emerging Equity Markets , 1997 .

[13]  M. Bahmani‐Oskooee,et al.  Stock prices and the effective exchange rate of the dollar , 1992 .

[14]  Paolo A. Pesenti,et al.  What Caused the Asian Currency and Financial Crisis , 1999 .

[15]  Paul Krugman,et al.  A Model of Balance-of-Payments Crises , 1979 .

[16]  Clive W. J. Granger,et al.  Some recent developments in a concept of causality , 2001 .

[17]  C. Granger.  Investigating Causal Relations by Econometric Models and Cross-Spectral Methods , 1969 .

[18]  R. Donnelly,et al.  The Share Price Reaction of U.K. Exporters to Exchange Rate Movements: An Empirical Study , 1996 .

[19]  Michael Osterwald-Lenum.  A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics , 1992 .

[20]  M. Obstfeld.  Models of Currency Crises with Self-Fulfilling Features , 1995 .

[21]  The stock market and exchange rate dynamics , 1989 .

[22]  P. Phillips,et al.  Asymptotic Properties of Residual Based Tests for Cointegration , 1990 .

[23]  Gordon M. Bodnar,et al.  Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA , 1993 .

[24]  C. K. Ma,et al.  ON EXCHANGE RATE CHANGES AND STOCK PRICE REACTIONS , 2008 .

[25]  Gordon M. Bodnar,et al.  Firm Valuation, Earnings Expectations, and the Exchange‐Rate Exposure Effect , 1994 .

[26]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[27]  Carmen M. Reinhart,et al.  The Twin Crises: The Causes of Banking and Balance-of-Payments Problems , 1996 .

[28]  Ying Wu.  Stock prices and exchange rates in VEC model—The case of Singapore in the 1990s , 2000 .

[29]  Cheng-Few Lee,et al.  Dynamic relationship between stock prices and exchange rates for G-7 countries , 2001 .

[30]  Richard A. Ajayi,et al.  ON THE DYNAMIC RELATION BETWEEN STOCK PRICES AND EXCHANGE RATES , 1996 .

[31]  International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns , 1997 .

[32]  Jia He,et al.  The Foreign Exchange Exposure of Japanese Multinational Corporations , 1998 .

[33]  Philippe Jorion,et al.  The Exchange-Rate Exposure of U.S. Multinationals , 1990 .

[34]  P. Perron,et al.  Testing For A Unit Root In A Time Series With A Changing Mean , 1990 .

[35]  B. Dumas,et al.  Exposure to Currency Risk: Definition and Measurement , 1984 .