Dynamic Relationship between Stock Prices and Exchange Rates: Evidence from Three South Asian Countries

Abstract

In this paper we have investigated the interactions between stock prices and exchange rates in three emerging countries of South Asia named as Bangladesh, India and Pakistan. We have considered average monthly nominal exchange rates of US dollar in terms of Bangladeshi Taka, Indian Rupee and Pakistani Rupee and monthly values of Dhaka Stock Exchange General Index, Bombay Stock Exchange Index and Karachi Stock Exchange All Share Price Index for period of January 2003 to June 2008 to conduct the study. Empirical result shows that exchange rates and stock prices data series are non stationary and integrated of order one. Then we have applied Johansen procedure to test for the possibility of a cointegrating relationship.   Result shows that there is no cointegrating relationship between stock prices and exchange rates. Finally we applied Granger causality test to find out any causal relationship between stock prices and exchange rates. Outcome shows there is no way causal relationship between stock prices and exchange rates in the countries.