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Causality Analysis of Volatility in Exchange Rate and Stock Market Prices: A Case Study of Pakistan

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  • Rana Ejaz Ali Khan
  • Rafaquat Ali

Abstract

This study attempted to investigate the direction of causation between the volatilities of exchange rate and stock market prices in Pakistan. Monthly time series data of Karachi Stock Exchange prices (KSE-100 Index) and exchange rate of Pakistan (Rupee against US Dollar) is used for the period of January 1992 to February 2013. Philips Perron (PP) unit root test is applied to check the stationarity. PP test results show that all variables were stationary at first difference. GARCH model is applied on each variable to measure the volatility. Then the series of each variable are used for Granger causality analysis. The results of Granger causality test show a bidirectional relationship between the exchange rate volatility and the variability of stock market prices in Pakistan.

Suggested Citation

  • Rana Ejaz Ali Khan & Rafaquat Ali, 2015. "Causality Analysis of Volatility in Exchange Rate and Stock Market Prices: A Case Study of Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(5), pages 805-815.
    • Handle: RePEc:asi:aeafrj:v:5:y:2015:i:5:p:805-815:id:1389
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    Cited by:

    1. Emeka Nkoro & Aham Kelvin Uko, 2016. "Exchange Rate and Inflation Volatility and Stock Prices Volatility: Evidence from Nigeria, 1986-2012," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-4.
    2. Sánchez Arévalo, Jorge Luis & Ferreira de Andrade, Alisson Maxwell & de Oliveira Vendramin, Elisabeth, 2023. "Ibovespa’s response to the behavior of oil and ore prices during the international crisis caused by COVID-19," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 15(1), pages 21-43, January.

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