DYNAMIC RELATIONSHIP BETWEEN STOCK MARKET AND EXCHANGE RATE: EMPIRICAL EVIDENCE IN ASEAN-3

Purpose - The main aim of this paper is to study the relationship between stock markets and exchange rates in selected ASEAN countries namely Malaysia, Thailand and the Philippines. In addition to looking at the long-run cointegration relationship between stock market and exchange rate, this study tries to examine the causality pattern of short-run relationship in the three countries. Design/methodology/approach - The study uses monthly data covering the period from January 1994 to September 2011. Several techniques are used including ADF, PP, and SL unit root tests, long-run Johansen cointegration test with structural breaks, vector error correction model (VECM) and Toda-Yamamoto approaches for short-run Granger causality test. Findings - The study indicates a cointegrating relationship between stock market and exchange rate for the case of Malaysia and the Philippines. The short-run Granger causality test showed two way causal relationship between stock market and exchange rate in Malaysia and Thailand, but none in the Philippines. The study suggests that the Asian financial crisis and global economic crisis give different impacts on the dynamic relationship between stock markets and exchange rates in the three countries studied. Thus, the economic policy implications of the said relationships are specific to a country. Originality/value - This study examines the relationship between the stock market and the exchange rate, the negative impact of the economic crises (structural breaks) and related policy implications for investors and policy makers in particular and the country in general.