Bivariate causality between exchange rates and stock prices in South Asia

Abstract

This article examines the relationship between exchange rates and stock prices in Bangladesh, India, Pakistan and Sri Lanka using daily data over a six-year period from 1995 to 2001. Both the Engle–Granger two-step and Johansen cointegration methods suggest that there is no long-run equilibrium relationship between these two financial variables in any of the four countries. Granger causality tests find that there is uni-directional causality running from exchange rates to stock prices in India and Sri Lanka, but in Bangladesh and Pakistan exchange rates and stock prices are independent.