Exchange Rate and Stock Price Interaction in Major Asian Markets: Evidence for Individual Countries and Panels Allowing for Structural Breaks

This paper examines the relationship between exchange rates and stock prices in eight Asian countries using cointegration and Granger causality tests over the period 1991 to 2005. We test for cointegration and Granger causality for both individual countries using the Gregory and Hansen (1996) cointegration test that accommodates a structural break in the cointegrating vector, and for a panel using the Westerlund (2006) panel Lagrange multiplier (LM) cointegration test that allows for multiple structural breaks in the level of the individual cointegrating equations. We find little evidence of cointegration. Our results for individual countries suggest that the only country for which exchange rates and stock prices are cointegrated over the entire period is Korea where there is weak long-run uni-directional Granger causality running from exchange rates to stock prices. Employing the panel LM cointegration test with multiple structural breaks we find that exchange rates and stock prices are not cointegrated. We conclude that for the eight countries exchange rates and stock prices primarily have only a contemporaneous effect on each other that is reflected in the short-run intertemporal co-movements between these financial variables.