Abstract
This paper will examine the causal correlation of exchange rates and stock prices in Vietnam. The data is collected daily from March 1<sup>st </sup>2007 to March 1<sup>st</sup> 2014. The whole sample period is divided into two sub-groups as before the stock market bottom, after stock market bottom and full sample period. Unit root tests are employed for checking the stationary of time series data such as ADF test, PP test and KPSS test. This paper employs the co-integration test and Granger causality test to identify the causal correlation between two variables. The results of paper prove that there is no causal correlation between exchange rate and stock price. It means that the stock price has no effect on exchange rate and vice versa. However, after stock market bottom from February 25<sup>th </sup>2009 to March 1<sup>st </sup>2014, this research finds that it has a long-run co-movement between these variables by applying the Johansen test.
Highlights
Since the Bretton Woods pact was collapsed during the 1970s, the developed and developing countries have applied the flexible exchange rate policy
We examine the causal correlation between stock prices and exchange rates in Vietnam market
Vietnam stock market had a sharp decline in VN-Index following a strong growth phase earlier
Summary
Since the Bretton Woods pact was collapsed during the 1970s, the developed and developing countries have applied the flexible exchange rate policy. Many researchers have investigated the correlation between the stock index and the exchange rate. In case of rising exchange rate have positive impacts on stock price movement, policy makers could send positive signals to stock market and attract investors by lower the value of domestic currency. The effect of correlation between exchange rate and stock price can influence enterprise and government through shares issued. This research is useful for investors as well because each small change in stock price and exchange rate will influence each individual property and profit of the company. Knowledge of causal correlation between exchange rate and stock price could help investors find out opportunities to analyze and predict stock market movements better to make their expected return or even abnormal return
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