Causal relationship between stock prices and exchange rates

摘要

This article investigates the nature of the causal linkage between stock markets and foreign exchange markets in Australia, Canada, Japan, Switzerland, and UK from January 1992 to December 2005. Recently developed cointegration tests are employed and no evidence of a long run relationship between the variables is found. Three variations of the Granger causality test are carried out and causality from exchange rates to stock prices is found for Canada, Switzerland, and UK; weak causality in the other direction is found only for Switzerland. The Hiemstra-Jones test is used to examine possible non-linear causality and the results indicate causality from stock prices to exchange rates in Japan and weak causality of the reverse direction in Switzerland.