Abstract
This paper explores the nature of the linkage between foreign exchange market and the Thai stock market using monthly data of exchange rate and stock prices during July 1997 to June 2010. The results from cointegration test in a bivariate framework show no long-run relationship between stock prices and nominal effective exchange rate. The noncausality test is thus employed to investigate the existence and direction of causality. It is found that there exists positive bidirectional causality between nominal effective exchange rate and stock prices. This evidence supports the flow-oriented theory, which indicates a positive linkage between stock prices and exchange rate. In addition, the results from a bivariate constant conditional correlation autoregressive conditional heteroskedastic model and the standard Granger causality test in multivariate framework indicate the existence of bidirectional causality between stock return and exchange rate return. Additionally, exchange rate return volatility does not cause stock return to decrease.
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