Causality Between Stock Exchange Returns and Currency Performance in Emerging Markets

Abstract

In recent 20 years of emerging economies history shows that foreign exchange and stock markets play a significant role within the global economic arena. A number of studies have been carried out examining the interaction between currency performance and stock market indices. We focus on finding the direction between currency performance and stock market return for selected countries which is important for policy makers. The panel data set includes the annual data for 10 emerging markets between 1987 and 2007 a period of several crises due to weaker financial liberalization. This paper applies the panel unit root test such as the Levin-Lin-Chu (LLC) Im-Peseran-Shin (IPS) and Fisher type tests and to understand if the mean is stationary or not then granger causality test. is applied. Appropriately to stock oriented models or portfolio balanced approach the results indicate that the stock market leads currency performance.