THE RELATIONSHIP BETWEEN EXCHANGE RATES AND STOCK PRICES: IMPLICATIONS FOR CAPITAL CONTROLS

摘要

The main purpose of this paper is to examine the links between the foreign exchange and stock markets and their implications for capital controls. In particular, the paper considers the capital controls imposed by the Malaysian government. The study examines six Asian countries over the period 1995-2001. There are inconsistent results in tests for bivariate causality between stock prices and exchange rates. These inconsistent results indicate that the stock and foreign exchange markets in the region may still be unstable. The study suggests that it might be premature for the Malaysian government to abandon completely the capital controls.