Open AccessThe Nonlinear Dynamic Relationship between Stock Prices and Exchange Rates in Asian Countries
Author(s) -
Ryuta Sakemoto
Publication year - 2017
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v8n2p40
Subject(s) - economics , econometrics , nonparametric statistics , volatility (finance) , exchange rate , stock (firearms) , causality (physics) , stock exchange , monetary economics , nonlinear system , granger causality , financial economics , finance , mechanical engineering , physics , quantum mechanics , engineering
This study explores dynamic relationships between stock prices and exchange rates in Asian countries. These relationships are complex and include both linear and nonlinear relationships. We employ a nonparametric causality test to explore them. The nonparametric causality test is more robust to a nonlinear relationship. The empirical results reveal that most countries have bi-directional causality relationships between stock prices and exchange rates. Some relationships are not captured by the linear model. These results support the theoretical model which shows dynamic interactions between stock and exchange rate markets. This study investigates the main driver to generate the nonlinear causality relatioships. The empirical results present that the main source for the nonlinearity is the volatility effects. In particular, they were substantial during the Asian and global financial crises. After controlling for the volatility effects, only one country shows the bi-directional causality relationship. In contrast to the previous studies, this study shows that the volatility effects are important between different asset markets. These findings suggest that controlling for exchange rate markets may be helpful to mitigate turmoil during a financial crisis.