Revisiting Quantile Granger Causality Between the Stock Price Indices and Exchange Rates for G7 Countries

Abstract

The daily data of the stock price index and the foreign exchange rate in G7 were utilized for the period between January 4, 1999 and June 30 2015. From the empirical study of Granger causality test in quantiles, there are three main findings. Firstly, there is no long-run significant relationship between the stock price index and exchange rate in G7. Secondly, different types of short-run relationships exist between the two variables among G7 countries. In Canada, Italy, and U.S.A., the relationship is bidirectional, and the asymmetric effect is at different quantiles. In France and Japan, the relationship is unidirectional, from the stock price index to the exchange rate, and the relationship is at different quantiles for the two countries. In Germany and U.K., the relationship is unidirectional in the opposite direction and is also at different quantiles. Lastly, it shows that international trading effects at different quantiles exist in Canada (at high quantile), Italy (at median quantile), and U.K. (at low quantile). On the other hand, portfolio balance effects at different quantiles exist in Germany (at low and median quantiles) and U.S.A. (at high quantile). The study shows neither effect in France and Japan. The empirical findings in this paper have important implications for academicians, international institutional investors, and policy-makers on the G7 markets.