International Journal of Finance, Insurance and Risk Management ISSN: 2047-0916

Causality Between Exchange Rate and Stock Prices: Evidence From ASEAN-5 Countries

Faizal Reza, Titin Ruliana, Imam Nazarudin Latif, Adisthy Shabrina Nurqamarani
International Journal of Finance, Insurance and Risk Management, Volume 10, Issue 2, 17-33, 2020
DOI: 10.35808/ijfirm/212

Abstract:

Purpose: The primary aim of this study is to explain the causality between exchange rate and stock prices, particulary in ASEAN-5 countries. The research also aims to complement previous researches discussing the relationship between exchange rate and stock prices. Design/Methodology/Approach: This research employs secondary data from 5 ASEAN countries, Malaysia, Indonesia, Singapore, Thailand, and the Philippines. The data include stock prices and daily exchange rates in the period 2010-2018. The research uses time series analysis through several procedures such as stationarity test and cointegration test, then applies Bivariate Vector Autoreggresive (BVAR) towards the data to identify whether they support traditional approach or portfolio balance aproach. This research also applies time series analysis to increase the accuracy of the findings. Findings: This research found that between the period 2010-2018, there were two countries within the ASEAN-5 which support the research hypothesis of portfolio balance approach, Singapore and Malaysia, whereas the rest did not support neither hypotheses, the traditional approach and the portfolio balance approach. Practical Implications: Among three of the ASEAN-5, Indonesia, Thailand, and the Philippines, it can be assumed that exchange rate is not the proper indicator for stock market condition in those countries as previously assumed by researchers. On the other hand, the result of the remaining two countries Malaysia and Singapore showed vibrant insight on the causality between their financial sector and exchange rate. Originality/Value: By this far, there has been numerous studies discussing the causality between exchange rate and stock market in emerging markets or developed countries, however, there are only few studies which compare countries in ASEAN-5 using two indicators.


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