Co-Integration between Stock Prices and Exchange Rate of Selected SAARC Countries: An Empirical Study

Sumaira Channa (), Pervaiz Ahmed Memon () and Muhammad Ramzan Kalhoro ()
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Sumaira Channa: MS Scholar, Department of Business Administration, Sukkur Institute of Business Administration, Postal: Office of Research, Innovation and Commercialization Sukkur Institute of Business Administration Airport Road Sukkur-65200, Sindh Pakistan
Pervaiz Ahmed Memon: Assistant Professor, Department of Business Administration, Sukkur Institute of Business Administration, Postal: Office of Research, Innovation and Commercialization Sukkur Institute of Business Administration Airport Road Sukkur-65200, Sindh Pakistan
Muhammad Ramzan Kalhoro: Research Assistant, Office of Research, Innovation & Commercialization – ORIC, Sukkur Institute of Business Administration, Postal: Office of Research, Innovation and Commercialization Sukkur Institute of Business Administration Airport Road Sukkur-65200, Sindh Pakistan

Sukkur IBA Journal of Management and Business, 2016, vol. 3, issue 1, 82-98

Abstract: This study examines the relationship between stock prices and exchange rates of three selected SAARC countries including Pakistan, India and Srilanka; using monthly data from period of January 1999 to December 2015. This study employs statistical techniques of Augmented Dickey Fuller (ADF), Phillips Perron (PP), unit root tests, and Johansen’s Co-integration test to determine long run equilibrium association ship between stock price indices and exchange rates. The study finds out no Co-integration between the two variables, hence no long run association is existing between them. This finding implies that investors in these markets are having more opportunities for diversifying their portfolios. However, using Granger Causality and impulse response tests, it finds significant short-run feedback effects, as stock prices Granger cause exchange rates in case of Pakistan and unidirectional causality flows from exchange rates to stock prices in case of Srilanka but no proof of causality running in either direction in case of India. Hence the findings for Pakistan and Srilanka have crucial policy implications.

Keywords: Exchange rate; Stock price indices; Johansen Co-integration; Granger Causality; Impulse Response; SAARC countries (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2016
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