Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries

Shyh-Wei Chen; Tzu-Chun Chen

doi:10.1108/01443581211222671

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Journal of Economic Studies

ISSN: 0144-3585

Online from: 1974

Subject Area: Economics

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Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries

Document Information:
Title:	Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries
Author(s):	Shyh-Wei Chen, (Department of International Trade, Chung Yuan Christian University, Chung Li, Taiwan, Republic of China), Tzu-Chun Chen, (Taiwan Research Institute, Taipei, Taiwan, Republic of China)
Citation:	Shyh-Wei Chen, Tzu-Chun Chen, (2012) "Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries", Journal of Economic Studies, Vol. 39 Iss: 2, pp.231 - 259
Keywords:	Causality, Exchange rates, Non-linear, Stock prices
Article type:	Research paper
DOI:	10.1108/01443581211222671 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	JEL classification – G1, F31, C32. The authors would like to thank the Editor, Professor Bahmani-Oskooee, and an anonymous referee of this journal for helpful comments and suggestions. The usual disclaimer applies.
Abstract:	Purpose – The purpose of this paper is to examine the relationship between stock prices and exchange rates in 12 OECD countries. Design/methodology/approach – The authors examine the nexus of stock prices and exchange rates for 12 OECD countries by using the vector error correction model, the bounds testing methodology and linear and non-linear Granger causality methods. Findings – The empirical results substantiate that a long-run level equilibrium relationship among the exchange rates and stock prices exists in only seven out of twelve countries. The results of the linear causality tests indicate that significant short-run and long-run causal relationships exist between the two financial markets. The results of the tests for non-linear Granger causality suggest that unidirectional and bidirectional non-linear causal relationships exist between stock prices and exchange rates among these OECD countries. Originality/value – The findings from this paper suggest the causal relationships between stock prices and exchange rates are not only linear, but also non-linear.