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Dynamic linkages between Asian stock prices and exchange rates: new evidence from causality in quantiles

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Abstract:

This article applies the Granger causality test in quantiles to investigate causal relations between stock returns and exchange rate changes for nine Asian markets over the period 1 January 1997 to 16 August 2010. Our empirical results indicate that the quantile causal relations vary across different quantiles and different periods. Although the causal effects of exchange rate changes on stock returns (or stock returns on exchange rate changes) are heterogeneous across quantiles, the overall evidence suggests that most stock and foreign exchange markets are negatively correlated. The result shows that there are more bidirectional causal relations in accordance with this method than the conventional least square (LS) estimation. The symmetry of these quantile causal effects (the ‘averaging effect’) helps to explain why conventional LS method usually obtains an insignificant result of causality.

Keywords: F30; G15; Granger causality; exchange rates and stock returns; quantile regression

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2013.868590

Affiliations: 1: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China 2: New Huadu Business School, Minjiang University, Fuzhou, China

Publication date: April 13, 2014

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