The Co-movement between exchange rates and stock prices in an emerging market

Research output: Contribution to journalArticle

Abstract

The aim of this paper is to examine the co-movement between exchange rates and stock prices of both the market and industries (industrial products and consumer products) in Malaysia from March 1994 to December 2013. Motivated by inconclusive evidences of previous studies to support the flow oriented and stock oriented hypothesis, the study applied error correction model including the Long Run Structural Model (LRSM) and variance decompositions to examine the relationship between exchange rates and stock prices. The findings suggest that the direction of causality runs from exchange rates to stock prices which are consistent with flow oriented theory. The influence of exchange rate, however, varies across industries with importing firms appearing as the most affected; indicating that Malaysian market is not homogenous. The major policy implication that can be deduced from the study is that active policy on currency management through monetary instrument (i.e. interest rates) will be helpful to stimulate the development of stock market in emerging countries like Malaysia.

Original languageEnglish
JournalJurnal Pengurusan
Volume48
Publication statusPublished - 2016

Fingerprint

Exchange rates
Comovement
Emerging markets
Stock prices
Malaysia
Industry
Variance decomposition
Causality
Emerging countries
Currency
Structural model
Policy implications
Importing
Interest rates
Error correction model
Stock market
Consumer products

Keywords

  • Error correction model
  • Exchange rates
  • LRSM
  • Stock prices
  • Variance decomposition

ASJC Scopus subject areas

  • Business and International Management
  • Accounting
  • Business, Management and Accounting (miscellaneous)

Cite this

@article{e16ce5485fdb42db8c84cce33b5dc5fa,
title = "The Co-movement between exchange rates and stock prices in an emerging market",
abstract = "The aim of this paper is to examine the co-movement between exchange rates and stock prices of both the market and industries (industrial products and consumer products) in Malaysia from March 1994 to December 2013. Motivated by inconclusive evidences of previous studies to support the flow oriented and stock oriented hypothesis, the study applied error correction model including the Long Run Structural Model (LRSM) and variance decompositions to examine the relationship between exchange rates and stock prices. The findings suggest that the direction of causality runs from exchange rates to stock prices which are consistent with flow oriented theory. The influence of exchange rate, however, varies across industries with importing firms appearing as the most affected; indicating that Malaysian market is not homogenous. The major policy implication that can be deduced from the study is that active policy on currency management through monetary instrument (i.e. interest rates) will be helpful to stimulate the development of stock market in emerging countries like Malaysia.",
keywords = "Error correction model, Exchange rates, LRSM, Stock prices, Variance decomposition",
author = "{Mohd Amin}, {Syajarul Imna} and Hawati Janor",
year = "2016",
language = "English",
volume = "48",
journal = "Jurnal Pengurusan",
issn = "0127-2713",
publisher = "Penerbit Universiti Kebangsaan Malaysia",

}

TY - JOUR

T1 - The Co-movement between exchange rates and stock prices in an emerging market

AU - Mohd Amin, Syajarul Imna

AU - Janor, Hawati

PY - 2016

Y1 - 2016

N2 - The aim of this paper is to examine the co-movement between exchange rates and stock prices of both the market and industries (industrial products and consumer products) in Malaysia from March 1994 to December 2013. Motivated by inconclusive evidences of previous studies to support the flow oriented and stock oriented hypothesis, the study applied error correction model including the Long Run Structural Model (LRSM) and variance decompositions to examine the relationship between exchange rates and stock prices. The findings suggest that the direction of causality runs from exchange rates to stock prices which are consistent with flow oriented theory. The influence of exchange rate, however, varies across industries with importing firms appearing as the most affected; indicating that Malaysian market is not homogenous. The major policy implication that can be deduced from the study is that active policy on currency management through monetary instrument (i.e. interest rates) will be helpful to stimulate the development of stock market in emerging countries like Malaysia.

AB - The aim of this paper is to examine the co-movement between exchange rates and stock prices of both the market and industries (industrial products and consumer products) in Malaysia from March 1994 to December 2013. Motivated by inconclusive evidences of previous studies to support the flow oriented and stock oriented hypothesis, the study applied error correction model including the Long Run Structural Model (LRSM) and variance decompositions to examine the relationship between exchange rates and stock prices. The findings suggest that the direction of causality runs from exchange rates to stock prices which are consistent with flow oriented theory. The influence of exchange rate, however, varies across industries with importing firms appearing as the most affected; indicating that Malaysian market is not homogenous. The major policy implication that can be deduced from the study is that active policy on currency management through monetary instrument (i.e. interest rates) will be helpful to stimulate the development of stock market in emerging countries like Malaysia.

KW - Error correction model

KW - Exchange rates

KW - LRSM

KW - Stock prices

KW - Variance decomposition

UR - http://www.scopus.com/inward/record.url?scp=85009262040&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85009262040&partnerID=8YFLogxK

M3 - Article

AN - SCOPUS:85009262040

VL - 48

JO - Jurnal Pengurusan

JF - Jurnal Pengurusan

SN - 0127-2713

ER -