Rashid, Abdul (2007): Exchange rates or stock prices, what causes what: A firm level empirical investigation.
Download (890kB) | Preview
The study employs cointegration, the standard Granger causality tests and vector error correction modeling technique to investigate the cause-effect association between exchange rates and stock prices for Pakistan. It uses weekly data for 70 individual securities and the trade-weighted exchange rate over the span from January 1, 1999 to March 31, 2004. The results of cointegration tests show that there is no co-movement between the said variables for most of the examined firms. On the issue of causation, the evidences are mixed. In some cases causation runs from stock prices to exchange rate whereas for some firms’ stock prices are affected by the changes in trade-weighted exchange rate. However, the analysis findings are generally supporting the asset market approach to exchange rate determination that reports no link between the said variables.
|Item Type:||MPRA Paper|
|Original Title:||Exchange rates or stock prices, what causes what: A firm level empirical investigation|
|English Title:||Exchange rates or stock prices, what causes what: A firm level empirical investigation|
|Keywords:||Stock Price; Exchange Rate; Firm-Level; Cointegration|
|Subjects:||P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics|
|Depositing User:||Dr Abdul Rashid|
|Date Deposited:||06 Dec 2010 00:59|
|Last Modified:||09 Mar 2017 09:56|
Abdallah I. S. A. and V. Murinde. 1997. “Exchange Rate and Stock Price Interaction in Emerging Financial Market, Evidence on India, Korea, Pakistan and Philippines”, Applied Financial Economics, Volume 7, Pages 25-35.
Adler, Michael and Dums, Bernard, 1984. “Exposure to Currency Risk: Definition and Measurement”, Financial Management. Volume 13, Pages 41-50.
Adulnassar Hatemi-J, and Munuchehr Irandoust. 2002. “On the Causality between Exchange Rate and Stock Prices: A Note”, Bulletin of Economic Research, Volume 54, Issue 2, Pages 197-203.
Aggarwal, R., 1981. “Exchange Rates and Stock Prices: A Study of U.S. Capital Market under Floating Exchange Rates,” Akron Business and Economic Review, Pages 7-12
Ajayi, Richard A. and Mbodja Mougoue. 1996. On the Dynamic Relation between Stock Prices and Exchange Rates”, Journal of Financial Research, Volume 19, Pages 193-207.
Bahmani-Oskooee, Mohsen. and A. Sohrabian, 1992. “Stock Prices and the Effective Exchange Rate of the Dollar” Applied Economics, Volume 24, Pages 459-464.
Bartove, E. and G. M. Bodnar. 1994, “Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect”, Journal of Finance, Volume 49, Pages 1755-1785.
Bodnar, Gordon M., Bernard Dumas, and Richard C. Marston, 1998. “Pass-Through and Exposures”, Working Paper, 1998.
Chow E. H., W.Y. Lee, and M. S. Solt. 1997. “The Exchange Rate Risk Exposure of Asset Returns”, Journal of Business, Volume 70, Pages 105-123.
DeJong, D. N., J. C. Nankervis, N. E. Savin, and C. H. Whiteman, 1989. “Integrated versus Trend Stationarity in Macroeconomic Time Series”, Working Paper No. 89-99, Department of Economics, University of Lowa, Lowa City, IA.
Diedbold, F. X. and G. D. Rudebusch, 1991. “On the Power of Dickey-Fuller Test against Fractional Alternatives”, Economics Letter, Volume 35, Pages 155-160.
Fazal Husain and Tariq Mahmood, 2001. “The Stock Market and the Economy in Pakistan”, The Pakistan Development Review, Volume 42, Number 2, Pages 107-114.
Franck, P. and Young, A. 1972. “Stock Price Reaction of Multinational Firms to Exchange Realignments”, Financial Management, Volume 1, Pages 66-73.
Frankel, J., 1983. “Monetary and Portfolio Balance Models of Exchange Rate Determination”, in Bhandri, J., Putnam, B. (eds) Economic Interdependence and Flexible Exchange Rates (Cambridge, Ma: MIT Press) Pages 84-114.
G. A. Calvo and C. A. Rodriguez, 1977. “A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations”, Journal of Political Economics, June, 85, Pages 617-625.
Granger, C.W.J, Huang, B. and Yang, C.W., 1998. “A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from the Recent Asian Flue”, Unpublished.
He, Jia and Ng Lillian K. 1998. “The Foreign Exchange Exposure of Japanese Multinational Co-operations”, Journal of Finance, April, Volume 53, Number 2, Pages 733-753.
Ibrahim M. H. 2000. “Cointegration and Granger Causality Tests of Stock Price and Exchange Rate Interactions in Malaysia”, Asean Economic Bulletin, April, Pages 1-10.
John R. Graham and Doniel A. Rogers, 2002. “Do firms Hedge in Response to Tax Incentives?” Journal of Finance, Volume LVII, Number (April),
Jorion Philippe. 1990. “The Exchange Rate Exposure of US Multinationals”, Journal of Business, Volume 63, Pages 331-345.
Kwiatkowski, D., P. C. B. Phillips, P. Schmidt and Y. Shin. 1992. “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root”, Journal of Econometrics, Volume 54, Pages 159-178.
Leland, Hayne E., 1998. “Agency Costs, Risk Management and Capital Structure”, Journal of Finance, Volume 53, Pages 1213-1243.
Naeem Muhammad and Abdul Rashid, 2002. “Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries”, The Pakistan Development Review, Volume 41, Number 4, Pages 535-550.
Ong, L. L. and H. Y. Izan, 1999. “Stocks and Currencies: Are They Related?” Applied Financial economics, Volume 9, Pages 523-532.
Rammasamy B. and Yeung M., 2001. “The Causality Between Stock Returns and Exchange Rates: Revisited, University of Nottingham in Malaysia-Division of Business Management Research Paper Series, Paper Number 2001-11.
Ross, S., 1987. “Regression to the Max”, Working Paper Yale School of Organization and Management.
Robert Driskill, 1980. “Exchange Rate Dynamics, Portfolio Balance, and Relative Prices”, The American Economic Review, Volume 70, Number 4, Pages 776-783.
Rudiger Dornbusch and Stanley Fischer, 1980. “Exchange Rate and the Current Account”, The American Review, Volume 70, Number 5, Pages 960-970.
Smith, C., 1992a. “Stock Market and the Exchange Rate: A Multi-country Approach,” Journal of Macroeconomics, Volume 14, Pages 607-629.
Soenen, L. A. and E.S. Hennigar, 1988. “An Analysis of Exchange Rates and Stock Prices: the U.S. Experience between 1980 and 1986,” Akron Business and Economic Review, Pages 7-16.
Solnik, B., 1987. “Using Financial Prices to Test Exchange Rate Models: A Note,” Journal of Finance, Volume 42, Pages 141-149.
Teshome Amare and Mohammed Mohsen, 2000. “Stock Prices and Exchange Rates in Leading Asian Economies: Short versus Long Run Dynamics”, The Singapore Economic Review, Volume 45, Number 2, Pages 165-181.
Yin Wu, 2000. “Stock Prices and Exchange Rates in A VEC Model-The Case of Singapore in the 1990s,” Journal of Economics and Finance, Volume 24, Number 3, Pages 260-274.
Yu,Qiao, 1997. “Stock Prices and Exchange Rates: Experience in Leading East Asian Financial Centre: Tokyo, Hong Kong and Singapore,” Singapore Economic Review, Volume 41, Pages 47-56.
Warren Baily and Y. Peter Chung. 1995. “Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market”, Journal of Finance and Quantitative Analysis, Volume 30, Number 4, Pages 541-561.