Abstract
This study examines the relationship between stock prices and exchange rates of three selected SAARC countries including Pakistan, India and Srilanka; using monthly data from period of January 1999 to December 2015. This study employs statistical techniques of Augmented Dickey Fuller (ADF), Phillips Perron (PP), unit root tests, and Johansen’s Co-integration test to determine long run equilibrium association ship between stock price indices and exchange rates. The study finds out no Co-integration between the two variables, hence no long run association is existing between them. This finding implies that investors in these markets are having more opportunities for diversifying their portfolios. However, using Granger Causality and impulse response tests, it finds significant short-run feedback effects, as stock prices Granger cause exchange rates in case of Pakistan and unidirectional causality flows from exchange rates to stock prices in case of Srilanka but no proof of causality running in either direction in case of India. Hence the findings for Pakistan and Srilanka have crucial policy implications.
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