Causal correlation between exchange rate and stock index: Evidence from VN-index

Abstract

This paper will examine the causal correlation of exchange rates and stock prices in Vietnam. The data is collected daily from March 1st 2007 to March 1st 2014. The whole sample period is divided into two sub-groups as before the stock market bottom, after stock market bottom and full sample period. Unit root tests are employed for checking the stationary of time series data such as ADF test, PP test and KPSS test. This paper employs the co-integration test and Granger causality test to identify the causal correlation between two variables. The results of paper prove that there is no causal correlation between exchange rate and stock price. It means that the stock price has no effect on exchange rate and vice versa. However, after stock market bottom from February 25th 2009 to March 1st 2014, this research finds that it has a long-run co-movement between these variables by applying the Johansen test.