Académique Documents
Professionnel Documents
Culture Documents
This article examines the relationship between exchange rates and stock prices in
Bangladesh, India, Pakistan and Sri Lanka using daily data over a six-year period
from 1995 to 2001. Both the EngleGranger two-step and Johansen cointegration
methods suggest that there is no long-run equilibrium relationship between these two
nancial variables in any of the four countries. Granger causality tests nd that there
is uni-directional causality running from exchange rates to stock prices in India and
Sri Lanka, but in Bangladesh and Pakistan exchange rates and stock prices are
independent.
I. INTRODUCTION
This article investigates the interaction between exchange
rates and stock prices for four South Asian countries using
daily data over the period 1995 to 2001. The relationship
between exchange rates and stock prices has several important implications. First, the relationship between stock
prices and exchange rates is often used to predict future
trends in each other by fundamental investors (Nieh
and Lee, 2001). Second, both variables have a crucial role
in inuencing the development of emerging markets,
particularly in those countries which have expanding
corporate sectors with listed rms and growing tradable
sectors which are sensitive to exchange rate policies
(Abdalla and Murinde, 1997). Third, theoretically stock
prices might inuence or be inuenced by exchange rates.
The traditional approach based on the interest parity condition suggests that changes in exchange rates should give
rise to changes in stock prices, but portfolio approaches
suggest that changes in stock prices lead changes in
exchange rates.
A number of empirical studies have examined the
relationship between exchange rates and share prices for
various markets and timeframes. Granger et al. (2000)
found that exchange rates lead stock prices in South
Korea; no support for any relationship in Japan and
Indonesia; and that stock prices lead exchange rates in
699
700
Data Set
There are only four countries in the South Asian region,
namely Bangladesh (BAN), India (IND), Pakistan (PAK)
and Sri Lanka (SRL) for which share price index (PI) and
exchange rate (ER) data is available. Table 1 gives the
Stock index
Currency
Bangladesh
Bangladesh SE
All share (dead)
BSE National 200
Karachi SE 100
Colombo SE All
Share
Taka
India
Pakistan
Sri Lanka
Indian rupee
Pakistan rupee
Sri Lankan rupee
BANPI
2 January 1995
23 November 2001
Change %a
US$ return %b
845.65
617.69
26.96
BANER
39.80
56.95
43.09
48.95
INDPI
441.57
338.61
23.32
INDER
31.37
48.05
53.18
49.94
PAKPI
2078.00
1358.81
34.61
PAKER
30.77
60.85
97.76
66.93
SRLPI
990.28
533.39
46.14
SRLER
49.67
93.19
87.63
71.29
Notes: aPositive change in exchange rates indicate appreciation of US$ against the local currencies. bRepresents return as viewed from
foreign investors perspective without adjusting for investment related costs.
Table 3. Unit root results for exchange rates and stock price indices
Variable
BANPI
BANER
INDPI
INDER
PAKPI
PAKER
SRLPI
SRLER
2.009
4.268*
2.590
2.483
2.791
2.490
2.771
2.439
PhillipsPerron
First dierences
(20)
(0)
(10)
(3)
(12)
(0)
(16)
(10)
Levels
7.646*
(19)
11.526*
21.645*
11.526*
26.014*
10.334*
13.627*
(9)
(2)
(9)
(2)
(15)
(9)
1.537
4.287*
2.251
2.420
2.571
2.394
2.753
2.487
First dierences
(4)
(3)
(8)
(13)
(15)
(7)
(22)
(8)
39.651*
(9)
37.961*
37.974*
40.689*
42.417*
28.151*
40.705*
(4)
(10)
(14)
(11)
(16)
(5)
Notes: *Coecient is signicant at the 1% level. Figures in parenthesis are lag lengths for the ADF test and
bandwidths for the PhillipsPerron test.
701
2.524
2.857
3.314
(10)
(12)
(24)
Z
k tk
No. of CE(s)
Trace statistic
max
5% CV
i Zti !t
i1
Table 5. Johansens cointegration tests between exchange rates and stock price indices
trace
k1
X
Max-Eigen statistic
5% CV
India
None
At most 1
6.213
1.040
15.41
3.76
5.173
1.040
14.07
3.76
Pakistan
None
At most 1
7.196
1.348
15.41
3.76
5.848
1.348
14.07
3.76
Sri Lanka
None
At most 1
11.259
0.097
15.41
3.76
11.162
0.097
14.07
3.76
702
m
X
j EXtj
j1
PIt
n
X
j PItj
"t
j1
j PItj
j1
n
X
m
X
j ERtj "t
j1
m24
X
fi EXti "1t
gi PIti "2t
i1
PIt a2
nX
24
i1
Table 6. Full information estimates for stock prices Granger-cause exchange rate equations
Stock prices Granger-cause exchange rates
Constant
PIt1
PIt 1
Bangladesh
India
Pakistan
Sri Lanka
7.95E05
(0.039)
0.0001
(0.052)
1.000
(18.839)*
0.0002
(2.925)*
0.007
(1.478)
0.110
(1.684)
0.042
(0.866)
0.045
(0.999)
0.0004
(3.292)*
0.001
(0.177)
0.0004
(0.017)
0.0004
(3.667)*
0.008
(1.130)
0.040
(0.333)
0.035
(0.343)
0.040
(0.476)
0.030
(1.012)
0.056
(1.073)
0.168
1.828
1.219
1.771
1.970
0.117
0.144
0.341
2.770
_
0.082
0.663
5.169
5.219
0.504
1.092
3.841
4.176
4.967
_
ERt 2
ERt 3
ERt 4
ERt 5
2 (1)
2 (2)
2 (3)
2 (4)
2WHITE
[0.682]
[0.554]
[0.748]
[0.778]
[0.742]
[0.732]
[0.866]
[0.952]
[0.597]
[0.775]
[0.718]
[0.159}
[0.265]
[0.973]
[0.296]
[0.147]
[0.243]
[0.291]
Notes: Dependent variable is ERt; 2 (1), 2 (2), 2 (3) and 2 (4) are results for Lagrange multiplier rst
order, second order, third order and fourth order serial correlation. 2WHITE are the results for Whites
heteroscedasticity test. The gures in round parenthesis below the coecients are t-statistics. The gures
in square parenthesis next to the diagnostic tests are probability values.
703
Constant
PIt 1
PIt 2
PIt 3
PIt 4
PIt 5
PIt 6
PIt 7
PIt 8
PIt 9
PIt 10
PIt 11
PIt 12
PIt 13
PIt 14
PIt 15
PIt 16
PIt 17
PIt 18
PIt 19
PIt 20
ERt 1
Bangladesh
India
Pakistan
Sri Lanka
0.003
(0.212)
0.082
(2.125)**
0.106
(0.877)
0.057
(1.626)
0.014
(0.307)
0.017
(0.411)
0.010
(0.239)
0.016
(0.475)
0.095
(1.920)
0.036
(1.317)
0.003
(0.077)
0.070
(2.191)**
0.102
(0.259)
0.037
(0.461)
0.031
(0.242)
0.004
(0.090)
0.117
(1.270)
0.053
(1.789)
0.038
(0.707)
0.021
(0.663)
0.100
(2.071)**
0.001
(0.226)
0.0001
(0.314)
0.112
(3.300)*
0.0003
(0.640)
0.052
(1.451)
0.058
(1.281)
0.042
(1.180)
0.0001
(0.7220)
0.437
(10.021)*
0.059
(1.568)
0.067
(1.914)
0.050
(1.484)
0.058
(1.757)
0.028
(0.797)
0.054
(1.679)
0.059
(1.804)
0.055
(1.740)
0.270
(2.134)**
0.252
(2.113)**
0.183
(1.604)
0.041
(0.780)
0.135
(3.276)*
ERt 2
2 (1)
2 (2)
2 (3)
2 (4)
2WHITE
0.002
0.031
0.155
0.646
_
[0.967]
[0.985]
[0.984]
[0.958]
1.130
1.518
2.061
2.278
_
[0.288]
[0.468]
[0.560]
[0.684]
0.353
0.365
0.521
0.999
_
[0.552]
[0.833]
[0.914]
[0.909]
2.936
2.949
3.224
3.230
_
[0.087]
[0.229]
[0.358]
[0.520]
Notes: Dependent variable is PIt, 2 (1), 2 (2), 2 (3) and 2 (4) are results for Lagrange multiplier rst order, second order, third order
and fourth order serial correlation. 2WHITE are the results for Whites heteroscedasticity test. The gures in round parenthesis below the
coecients are t-statistics. The gures in square parenthesis next to the diagnostic tests are probability values.
704
F-statistics
Bangladesh
Bangladesh
India
India
Pakistan
Pakistan
Sri Lanka
Sri Lanka
F(1,
F(1,
F(1,
F(2,
F(1,
F(1,
F(1,
F(2,
1795)
1757)
1791)
1793)
1795)
1791)
1777)
1778)
III. CONCLUSION
This article examined the relationship between exchange
rates and stock prices in four South Asian countries.
An interesting nding of this article is that there is no
long-run equilibrium relationship between these two nancial variables in any of the four countries. This result is
obtained from both the EngleGranger two-steps and
Johansen cointegration tests. While this nding is inconsistent with that of most previous studies, it supports the
results of Bahamani-Oskooee and Sohrabian (1992) and
Nieh and Lee (2001) for G7 countries. The nding that
exchange rates Granger-cause stock prices in India and
Sri Lanka is consistent with the traditional view based on
the interest-parity condition, but there is no evidence of
causality running either way in Bangladesh or Pakistan.
Abdalla and Murinde (1997) also generally found that
exchange rates Granger-cause stock markets in emerging
markets, although they additionally found unidirectional
causality from exchange rates to stock prices in Pakistan.
The results for India and Sri Lanka have important policy
eects. The main implication is that changes in exchange
rates inuence rms exports and ultimately aect stock
prices in these countries.
REFERENCES
Abdalla, I. and Murinde, V. (1997) Exchange rate and stock
price interactions in emerging nancial markets: evidence
on India, Korea, Pakistan and the Philippines, Applied
Financial Economics, 7, 2535.
Results
0.0030 [0.959]
0.0510 [0.826]
2.1829 [0.140]
4.1979 [0.015]
0.0315 [0.859]
2.572 [0.1089]
1.2766 [0.259]
5.6304 [0.004]
Accept H0
Accept H0
Accept H0
Reject H0
Accept H0
Accept H0
Accept H0
Reject H0