The Granger causality effect between the stock market and exchange rate volatility in the ASEAN 5 countries

Abstract

The issue of inter-relation between stock returns and exchange rates has often been discussed by economists since they both play important roles in influencing the development of a country's economy. The specific objective of the study is to identify the Granger causality effect between the stock market and exchange rate volatility in the ASEAN 5 countries. In order to capture the interactions between stock market performance and exchange rate volatility, the multivariate vector autoregression (VAR) framework estimations were utilized. The results showed that there was a bi-directional causality or feedback interaction between stock market and exchange rate volatility in Malaysia and a unidirectional causality effect from stock market to exchange rate volatility in Thailand. However, the findings showed no causality between stock market and exchange rate volatility in Indonesia, the Philippines and Singapore. Based on the findings, the Malaysian government must be cautious in their implementation of equity market and exchange rate policies relatively to the other ASEAN 4 countries because such policies have impact on both markets in Malaysia.Keywords-exchange rate volatilit; equity market; financial crisi; Granger causality effect and GARCH model I.

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

“…Empirical evidences have shown causation from exchange rate to stock market prices (Abdalla and Murinde (1997) for Pakistan; Erbaykal and Okuyan (2007) for eight countries out of thirteen countries; Yusuf and Rahman (2012) for Malaysia; Olugbenga (2012) for Nigeria) as well as causation from stock market prices to exchange rate (Erbaykal and Okuyan (2007) for five countries out of thirteen countries; Yusuf and Rahman (2012) for Thailand). The studies have also found bidirectional causality (Erbaykal and Okuyan (2007) for three countries; Yusuf and Rahman (2012) for Malaysia). However, there are some evidences of no causation between exchange rate and stock market prices (Asaolu and Ogunmuyiwa, 2011;Zia and Rahman, 2011).…”

Estimation of Effective Fronto-Parietal connectivity during Motor Imagery using partial granger causality analysis

“…It provides information about direct and indirect influences between channels representing the direction of information flow [8]. The notion of Granger causality (GC) [9] based on MVAR model, has been extensively employed to investigate directional influences within coupled variables of dynamical systems in various areas, such as climate studies [10], [11], economics [12], [13] and neuroscience [14], [15]. If prediction of any time-varying process X can be enhanced by considering the past information of another time-varying process Y instead of the past information of process X alone, then the process Y is said to granger cause process X.…”