Reexamining the relationships between stock prices and exchange rates in ASEAN-5 using panel Granger causality approach

Abstract

We revisit the relationships between the equity market and currency market in ASEAN-5 using the panel Granger causality and panel DOLS methodologies. Our results support the “stock-oriented” hypothesis of exchange rates proposed by Branson (1983) and Frankel (1983), which states that exchange rates impact stock prices negatively via capital mobility. Meanwhile, on a per country and panel basis, the testing results using the DOLS approach match those of the short-run and long-run causal relations running from exchange rates to stock prices. These findings suggest that the monetary authorities for the ASEAN-5 should keep allowing their currency values of being determined by the economic fundamentals instead of interrupting them only in order to stimulate export growth unless a great deal of short-term speculative funds (hot money) flow into the currency markets.