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Causal relationship between stock prices and exchange rates

Author

Listed:
  • Paul Alagidede
  • Theodore Panagiotidis
  • Xu Zhang

Abstract

This article investigates the nature of the causal linkage between stock markets and foreign exchange markets in Australia, Canada, Japan, Switzerland, and UK from January 1992 to December 2005. Recently developed cointegration tests are employed and no evidence of a long-run relationship between the variables is found. Three variations of the Granger causality test are carried out and causality from exchange rates to stock prices is found for Canada, Switzerland, and UK; weak causality in the other direction is found only for Switzerland. The Hiemstra-Jones test is used to examine possible non-linear causality and the results indicate causality from stock prices to exchange rates in Japan and weak causality of the reverse direction in Switzerland.

Suggested Citation

  • Paul Alagidede & Theodore Panagiotidis & Xu Zhang, 2011. "Causal relationship between stock prices and exchange rates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(1), pages 67-86.
    • Handle: RePEc:taf:jitecd:v:20:y:2011:i:1:p:67-86
    DOI: 10.1080/09638199.2011.538186
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    More about this item

    Keywords

    Granger causality; stock prices; exchange rates; Hiemstra-Jones test; non-parametric causality;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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