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A Bivariate Linear and Nonlinear Causality between Stock Prices and Exchange Rates

Author

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  • Manish Kumar

    (Indian Institute of Technology Madras, India)

Abstract

The present study examines dynamic relation between stock index and exchange rate by using the daily data for India. The study uses the unit root and cointegration tests to test for the long run relationship between the two variables. The study also uses linear and nonlinear granger causality tests after removing the volatility dependence from the series to examine the dynamic relationship between the two variables. Following Hristu-Varsakelis and Kyrtsou (2008), the nonlinear granger causality between stock index and exchange rate is investigated by using bivariate noisy Mackey Glass model. The empirical evidence suggests that there is no long-run relationship; however, there is bidirectional linear and nonlinear granger causality between stock index and exchange rates. The findings of the study strongly support the micro and macroeconomic approach on the relationship between exchange rates and stock prices.

Suggested Citation

  • Manish Kumar, 2009. "A Bivariate Linear and Nonlinear Causality between Stock Prices and Exchange Rates," Economics Bulletin, AccessEcon, vol. 29(4), pages 2884-2895.
    • Handle: RePEc:ebl:ecbull:eb-09-00581
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    References listed on IDEAS

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    8. Bathia, Deven & Demirer, Riza & Ferrer, Román & Raheem, Ibrahim D., 2023. "Cross-border capital flows and information spillovers across the equity and currency markets in emerging economies," Journal of International Money and Finance, Elsevier, vol. 139(C).
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    More about this item

    Keywords

    Stock Prices; Exchange Rates; Bivariate Causality; Nonlinear Granger Causality;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • F3 - International Economics - - International Finance

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