Relationship between Stock Prices and Exchange Rates: Evidence from Bangladesh

Md Lutfur Rahman,Jashim Uddin

doi:10.5539/ijbm.v3n9p52

Abstract

In this paper we have investigated the interactions between stock prices and exchange rates in the emerging economy of Bangladesh. We have considered monthly nominal exchange rates of US dollar, euro, Japanese yen, pound sterling and monthly values of Dhaka Stock Exchange General Index for period of June 2003 to March 2008 to conduct the study. Empirical result shows that exchange rates and stock prices data series are non stationary and integrated of order one. Then we have applied Johansen procedure to test for the possibility of a cointegrating relationship. Result shows that there is no cointegrating relationship between stock prices and exchange rates. Finally Granger causality test shows that stock prices Granger cause exchange rates of US dollar and Japanese yen but there is no way causal relationship between stock prices and exchange rates of euro and pound sterling.

Highlights

The recent liberalization of foreign capital controls and adoption of floating exchange rate regime in Bangladesh have widened the scope of studying the relationship between exchange rates and stock prices
Data used in this study include monthly nominal exchange rates of US dollar (EXus), nominal exchange rates of Euro (EXeu), nominal exchange rates of Japanese Yen (EXjp), nominal exchange rates of UK Pound Sterling (EXuk) and monthly closing values of Dhaka Stock Exchange General Index (DSEGI) for a period of June 2003 to March 2008
The results show that there is a unidirectional causality from stock prices to exchange rates of US dollar and Japanese yen as F-statistic is significant at 5% level

Summary

Introduction

The recent liberalization of foreign capital controls and adoption of floating exchange rate regime in Bangladesh have widened the scope of studying the relationship between exchange rates and stock prices. Liberalization of foreign capital controls has opened the possibility of international investment and the adoption of floating exchange rate regime has increased the volatility of foreign exchange market. There is no empirical harmony among the researchers regarding the interactions between stock prices and exchange rates which justify the need of more research in this area to contribute to the literature. In a country like Bangladesh where the economy is still emerging and capital market is still in a vulnerable condition, according to our knowledge no study has been made so far to investigate the relationship between stock prices and exchange rates which encourages us to conduct the study to detect the relationship between the variables

Data and Methodology

Empirical Results

Conclusion