The Granger causality effect between the stock market and exchange rate volatility in the ASEAN 5 countries

Abstract

The issue of inter-relation between stock returns and exchange rates has often been discussed by economists since they both play important roles in influencing the development of a country's economy. The specific objective of the study is to identify the Granger causality effect between the stock market and exchange rate volatility in the ASEAN 5 countries. In order to capture the interactions between stock market performance and exchange rate volatility, the multivariate vector autoregression (VAR) framework estimations were utilized. The results showed that there was a bi-directional causality or feedback interaction between stock market and exchange rate volatility in Malaysia and a unidirectional causality effect from stock market to exchange rate volatility in Thailand. However, the findings showed no causality between stock market and exchange rate volatility in Indonesia, the Philippines and Singapore. Based on the findings, the Malaysian government must be cautious in their implementation of equity market and exchange rate policies relatively to the other ASEAN 4 countries because such policies have impact on both markets in Malaysia.