Title: A study of the interaction between exchange rates and stock market prices

Authors: Mihir Dash; Ajit Kumar Sahu

Addresses: Department of Quantitative Methods, School of Business, Alliance University, Chikkahagade Cross, Anekal Bangalore, 562106, India ' HSBC Electronic Data Processing India Pvt. Ltd., Bangalore 560076, India

Abstract: This study examines the interaction between exchange rates and stock market prices in some developed economies (viz. Australia, Japan, Canada, UK, USA, Hong Kong, and Switzerland) and some emerging economies (China and Brazil). The study period considered is from 01/01/2007 to 23/07/2012, and the study is based on weekly data. The results of the study provide evidence of uni-directional Granger causality of exchange rates on stock market returns, except in cases of China and Canada. The results support the flow-oriented model, which suggests that changes in exchange rates cause changes in stock prices, and provide evidence against the portfolio balance model, which suggests that stock market movements cause changes in the exchange rate.

Keywords: exchange rates; stock market prices; Granger causality; flow-oriented model; portfolio balance model.

DOI: 10.1504/IJEBR.2018.092142

International Journal of Economics and Business Research, 2018 Vol.15 No.4, pp.541 - 549

Received: 08 Nov 2016
Accepted: 29 Apr 2017
Published online: 05 Jun 2018 *

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