Causal Relationship between Stock Prices and Exchange Rates

Citation

Alagidede P, Panagiotidis T & Zhang X (2010) Causal Relationship between Stock Prices and Exchange Rates. Stirling Economics Discussion Paper, 2010-05.

Abstract
This paper investigates the nature of the causal linkage between stock markets and foreign exchange markets in Australia, Canada, Japan, Switzerland, and UK from 1992:1 to 2005:12. 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 United Kingdom; weak causality in the other direction is found only for Switzerland. The Hiemstra-Jones test is used to examine possible nonlinear causality and the results indicate causality from stock prices to exchange rates in Japan and weak causality of the reverse direction in Switzerland.

Keywords
Stock Prices; Nonparametric Causality; Hiemstra-Jones Test; Exchange Rates; Granger Causality; Stock exchanges; Foreign exchange

JEL codes

• G15: International Financial Markets
• C32: Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

• SEDP-2010-05-Alagidede-Panagiotidis-Zhang[1].pdf