International Review of Economics and Finance 22 (2012) 161–172

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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

The comovement between exchange rates and stock prices in the Asian
emerging markets
Chien-Hsiu Lin ⁎
Department of Money and Banking, National Chengchi University, Taipei, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: This study investigates the comovement between exchange rates and stock prices in the Asian
Received 9 October 2010 emerging markets. The sample covers major institutional changes, such as market liberaliza-
Received in revised form 23 September 2011 tion and financial crises, so as to examine how the short-term and long-term relations change
Accepted 27 September 2011
after such events. The autoregressive distributed lag (ARDL) model proposed by Pesaran et al.
Available online 14 October 2011
(2001) is adopted, which allows us to deal with structural breaks easily, and to handle data
that have integrals of different orders. Interest rates and foreign reserves are also included in
JEL classification: the analysis to reduce potential omitted variable bias. My empirical results suggest that the
F31
comovement between exchange rates and stock prices becomes stronger during crisis periods,
G01
consistent with contagion or spillover between asset prices, when compared with tranquil pe-
riods. Furthermore, most of the spillovers during crisis periods can be attributed to the channel
Keywords: running from stock price shocks to the exchange rate, suggesting that governments should
Comovement
stimulate economic growth and stock markets to attract capital inflow, thereby preventing a
Stock prices
Exchange rates
currency crisis. However, the industry causality analysis shows the comovement is not stron-
Asian emerging markets ger for export-oriented industries for all periods, such as industrials and technology industries,
ARDL model thus implying that comovement between exchange rates and stock prices in the Asian emerg-
ing markets is generally driven by capital account balance rather than that of trade.
© 2011 Elsevier Inc. All rights reserved.

1. Introduction

The relationship between stock prices and exchange rates has received a considerable amount of attention from: economists, in-
ternational investors and policy makers. Theoretically, we can summarize that the dynamic relationship between stock prices and ex-
change rates is viewed in two ways. On the one hand, the “flow-oriented” models of exchange rates, as proposed by Dornbusch and
Fischer (1980), focus on the current account balance or the trade balance. The proponents of these models state that changes in ex-
change rates affect international competitiveness and thus influence real income and output. Moreover, because stock prices can be
interpreted as the present value of future cash flows of firms, they react to exchange rate changes. The “stock-oriented” models of ex-
change rates, as proposed by Branson (1993) and Frankel (1983), on the other hand, posit that innovations in the stock market affect
aggregate demand through wealth and liquidity effects, thereby influencing money demand (Gavin, 1989.) For example, a decrease in
stock prices causes a reduction in the wealth of domestic investors, which in turn leads to a lower demand for money with ensuing
lower interest rates. Subsequently, the lower interest rates discourage capital inflows, ceteris paribus, which causes currency depre-
ciation and therefore, exchange rate dynamics may be affected by stock price movements.
On the empirical front, a number of studies have been conducted to verify the relationship between stock prices and exchange rates,
with the use of different methodologies and datasets, but the results have been mixed. Furthermore, most of this research has been

⁎ No. 64, Zhinan Rd., Wenshan District, Taipei, Taiwan. Tel.: + 886 2 29393091x88064.
E-mail address: clin@nccu.edu.tw.

1059-0560/$ – see front matter © 2011 Elsevier Inc. All rights reserved.
doi:10.1016/j.iref.2011.09.006
162 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172

conducted for periods where the stock markets are operating under normal conditions. It would be interesting to verify whether or not
transmissions between two asset markets, the foreign exchange market and the equity market, behave differently during crisis periods
when compared with tranquil ones. When asset markets are under crisis, returns will be lower and volatility greater as well as the cor-
relation between asset markets tending to be higher (see Climent and Meneu, 2003; Guo, Chen and Huang, 2011). In other words, the
implications are that the comovement of asset prices has generally been found to strengthen during the unstable periods.
The goal of this paper is to investigate the comovement between foreign exchange rates and stock prices in the Asian emerging
markets. I concentrate on these markets, because Erb et al. (1998) discovered that the 1997 Asian crisis had a widespread impact
on currency valuation, with many of the affected countries' currencies severely declining in value during the event. The occur-
rence of a currency crisis triggered a sharp drop in stock prices in the region and thus, a key feature of the crisis was a simulta-
neous fall in currency and stock prices. More recently, quantitative easing policy has been used by: the United States, the
United Kingdom and the Eurozone, during the financial crisis of 2008–2010, causing new money to flow into the Asian emerging
markets, which has led to substantial fluctuations in currency valuation. Given that these markets experienced these currency
shocks, with consequent overwhelming negative impacts on their economies and stock markets, this may have affected the per-
ception of investors with respect to the relationship of exchange rates and stock prices, such that they began to put more weight
on the linkage between the two.
On the other hand, Asian emerging countries are classified as “managed float” exchange rate regimes, with their central banks
intervening in the foreign exchange market so as to influence the exchange rate in favorable directions. When, for instance, there
is a currency market shock, such as a sharp depreciation or speculative attack, the domestic monetary authority may raise interest
rates in an attempt to reduce capital outflow or sell foreign reserves to avoid further depreciation. Higher interest rates, however,
may exert downward pressure on stock prices. Moreover, some of these countries have followed the policy of deliberately keep-
ing their currencies a little under-valued so as to boost exports. Motivated by the intervention by central banks in the foreign ex-
change market, I incorporate two additional variables, interest rates and foreign reserves, so as to examine fully the relationship
between stock prices and exchange rates.
This paper complements the extant empirical literature by focusing on six Asia emerging markets: India, Indonesia, Korea, the
Philippines, Taiwan and Thailand. 1 More specifically, the main purpose here is to investigate, fully, the dynamic short-term causal
relations and the long-term equilibrium relations between the exchange rates and the stock prices of these six Asian emerging
countries for the period from January 1986 to December 2010, covering the foreign exchange and stock market liberalization dur-
ing the 1990s, as well as the 1997 Asian financial crisis and the 2008 global financial crisis. I particularly pay attention to the
changing relationship between exchange rates and stock prices across different subsample periods. The specific aim is to address
the following related questions: (1) Do foreign exchange and stock markets become more integrated with during crisis periods
when compared with those that are tranquil? (2) Do currency crises spill over or are they contagious to the stock market or
vice versa? (3) Does comovement between foreign exchange and stock markets become higher in specific industries, thus reflect-
ing the importance of the industrial factor in the comovement of asset markets? The results of this investigation will also indicate
how policy intervention can change the interaction of asset prices.
The rest of this paper is organized as follows. Section 2 gives a brief literature review and the contributions to knowledge of
this paper. Section 3 explains the econometric methodology and presents the empirical results. Section 4 contains industry anal-
ysis and the last section is the conclusion.

2. Brief literature review and contributions of the study

On the empirical front, a number of studies have examined the relationship between stock prices and exchange rates and most that
have considered these markets have been focused on the U.S. (see Jorion, 1990; Bahmani-Oskooee and Sohrabian, 1992; Amihud, 1993;
Bartov and Bodar, 1994; Ajayi and Mougoue, 1996, to name a few.) Similar tests have also been performed by Bodnar and Gentry (1993)
and Qiao (1996), in relation to the Japanese and Canadian markets and the markets in: Japan, Hong Kong and Singapore. However the
findings are not uniform across the various research endeavors. In this regard, Abdalla and Murinde (1997) showed that exchange rate
changes lead stock prices in: India, South Korea and Pakistan, but it is the reverse in the Philippines, whereas Ajayi et al. (1998) found no
consistent causal relations between the stock and currency markets in emerging economies. Qiao (1996) found the stock price-
exchange rate causal nexus to be different across countries. More specifically, the direction of causation is bi-directional for Japan, is
unidirectional from foreign exchange to the stock market for Hong Kong, and is non-causal for Singapore. He also noted there is a strong
long-run relationship between exchange rates and stock prices in these three countries.
Regarding emerging markets analysis, the 1997 Asian currency crisis motivated several researchers to dwell on the causality
between exchange rates and stock prices (see Granger et al., 2000; Pan, Fok and Liu, 2007). Granger et al. (2000) reported that
exchange rates influence stock prices in Korea, but it is the opposite in Hong Kong, Malaysia, the Philippines, Singapore, Thailand
and Taiwan. They also found no relationship between the two variables in Japan and Indonesia. Pan, Fok and Liu (2007) showed a sig-
nificant causal relation from exchange rates to stock prices for: Hong Kong, Japan, Malaysia, and Thailand, before the 1997 Asian financial

1
According to the MSCI list, as of May 2010, MSCI Barra classified the following 8 countries as Asian emerging markets: China, India, Indonesia, Malaysia, the
Philippines, South Korea, Taiwan and Thailand. Although China is the largest one of Asian emerging countries, it implements a pegged exchange rate system to the
US dollar. Moreover, owing to its great currency fluctuation, Bank Negara Malaysia pegged the ringgit to the US dollar in September 1998, maintaining its 3.80 to
the dollar value for almost seven years. Since the objective of this paper is to investigate the comovement between stock prices and exchange rates, I eliminate
China and Malaysia from the sample.
 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172 163

crisis, and a causal relation from the equity to the foreign exchange market for: Hong Kong, Korea and Singapore. Further, whilst no coun-
try showed a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to
stock prices was found for all Asian countries, except Malaysia. In sum, the above shows that there is no consensus among researchers
on the relationship between stock prices and exchange rates, suggesting further studies are needed to shed light on the issue.
This paper complements the empirical literature in the following ways. First, the analysis employs data series that span from
January 1986 to December 2010, covering the foreign exchange and stock market liberalization during the early 1990s in Asian
emerging markets, as well as the 1997 Asian financial crisis and the 2008 global financial crisis. Consequently, the relationship
between exchange rates and stock prices of several subsamples covering both crisis and tranquil periods are available for the
analysis. Further, two additional variables, interest rates and foreign reserves, are included in the exchange rate-stock price anal-
ysis to capture the effect of portfolio adjustment and policy intervention. Moreover, using multivariate contexts may help reduce
potential omitted variable bias that could arise in the bivariate case.
Secondly, one potential problem with long period data sets is that one will get caught up with structural breaks in the ob-
served data and a ensuing technical issue is that these often are empirically indistinguishable from the unit root problem,
when applying traditional unit root tests, such as the augmented Dickey–Fuller test. All of these problems with the data render
traditional econometric techniques, such as the VAR or the co-integration treatments, inapplicable for addressing the proposed
research as they cannot deal with data with integrals of different orders. Unlike previous studies that have used VAR or co-
integration techniques directly, I adopt the autoregressive distributed lag (ARDL) model, or bounds testing approach, as proposed
by Pesaran et al. (2001), which has the major advantage of allowing us to deal with data that have integrals of different orders,
which are usually present when encountering a structural breaks problem.
Thirdly, I investigate whether the relationship between exchange rates and stock prices would vary across different industries.
My focus in this case is that a stronger comovement between these two variables might be observed in such major export-
oriented industries as the industrials and technology industries, as compared with those of basic materials and consumer
goods. Thus, I select the following sector indexes of Asian emerging markets to address this question: industrials, technology,
basic materials and consumer goods.

Table 1
Summary statistics for the changes of stock prices, exchange rates, interest rates and foreign reserves.

Market liberalization period The 1997 Asian crisis period The tranquil period 1999/ The 2008 global crisis period
1986/1–1997/6 1997/7–1999/7 8–2008/2 2008/3–2010/12

Mean Standard deviation Mean Standard deviation Mean Standard deviation Mean Standard deviation

Panel A: stock prices

India 0.0062 0.0432 0.0011 0.0383 0.0057 0.0299 0.002 0.0428
Indonesia 0.0076 0.041 − 0.0033 0.0711 0.0064 0.0291 0.0039 0.0434
Korea 0.0049 0.0321 0.0046 0.072 0.0023 0.0343 0.0023 0.0326
Philippines 0.0097 0.0471 − 0.0032 0.0563 0.0012 0.028 0.0038 0.0337
Thailand 0.0074 0.0601 − 0.0034 0.0386 0.0005 0.0326 0.0008 0.0366
Taiwan 0.0042 0.0404 − 0.0025 0.0729 0.0026 0.0322 0.0026 0.0397

Panel B: exchange rates

India 0.0034 0.0116 0.0033 0.007 − 0.0003 0.0052 0.0024 0.01
Indonesia 0.0024 0.0136 0.018 0.0893 0.0012 0.0194 − 0.00008 0.0187
Korea 0 0.0039 0.0053 0.0373 − 0.0011 0.0087 0.0026 0.0257
Philippines 0.001 0.0097 0.0065 0.0233 0.0002 0.0086 0.0011 0.0092
Thailand − 0.0011 0.0056 0.0026 0.0123 − 0.0002 0.0054 − 0.0002 0.0073
Taiwan − 0.00009 0.0026 0.0063 0.0403 − 0.0006 0.0089 − 0.0007 0.0068

Panel C: interest rates

India − 0.0021 0.14 0.0084 0.1858 − 0.0005 0.2724 − 0.0011 0.1243
Indonesia 0.0003 0.0688 − 0.0014 0.2067 − 0.0023 0.1019 − 0.0035 0.0153
Korea 0.0008 0.0605 − 0.0155 0.0991 0.0002 0.0165 − 0.0087 0.0398
Philippines − 0.0008 0.279 − 0.0099 0.1226 − 0.0023 0.0243 − 0.0029 0.0172
Thailand 0.0024 0.0867 − 0.0136 0.0448 − 0.0036 0.0346 − 0.027 0.1208
Taiwan − 0.0014 0.1107 − 0.0245 0.2882 0.002 0.082 − 0.0062 0.0469

Panel D: foreign reserves

India 0.0039 0.0496 0.0038 0.0147 0.0087 0.0101 − 0.0002 0.0083
Indonesia 0.0037 0.0261 0.0046 0.0262 0.0024 0.0125 0.0073 0.0136
Korea 0.0079 0.0298 0.0115 0.0365 0.0052 0.0065 0.0019 0.0109
Philippines 0.0087 0.0705 0.0044 0.031 0.0033 0.0141 0.0075 0.0118
Thailand 0.0035 0.0106 0.0019 0.0083 0.0037 0.0069 0.0046 0.005
Taiwan 0.0077 0.0142 0.0002 0.0284 0.0041 0.0081 0.0074 0.0087

Note: All data are transformed into logarithmic scale.

164 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172

3. Methodology and results

3.1. Data

This research is conducted using exchange rate, stock price, interest rate and foreign reserves in six Asian emerging countries,
including: India, Indonesia, Korea, the Philippines, Taiwan and Thailand. The data are monthly, covering the period from January
1986 to December 2010 and the foreign exchange rates, with respect to the US dollar for each country, are employed. For stock
prices, closing prices for stock market indexes are used: the Bombay Stock Exchange SENSEX Price Index, for India; the Jakarta
Stock Exchange Composite Price Index, for Indonesia; the Korea Stock Exchange Composite, for Korea; the Philippines Stock Ex-
change Composite Price Index, for the Philippines; the Taiwan Stock Exchange Weighted-price Index, for Taiwan; and the
Bangkok S.E.T. Price Index, for Thailand, with the interest rates being taken from the overnight values for each country. Lastly,
the foreign reserves are official reserves minus gold. Data for exchange rates, stock prices and interest rates are obtained from
Datastream and data for reserves from International Financial Statistics (IFS). All data are transformed into logarithmic scale.
Table 1 shows the summary statistics for the changes of each variable for four subsample periods: the market liberalization period,
from January 1986 to July 1997; the 1997 Asian crisis period, from July 1997 to July 1999; the tranquil period, from August 1999 to
February 2008 and the 2008 global crisis period, from March 2008 to December 2010.2 When compared with the average positive
stock returns and currency appreciation for most of the sample countries in the tranquil period, the average stock returns emerge
as being negative and the average exchange rate changes show depreciation during the 1997 Asian crisis period, with greater vola-
tility than during the other periods of interest. However, for the 2008 global crisis period the average stock returns remain positive
and the average exchange rate changes do not always show depreciation. Moreover, the volatilities of market returns and exchange
rate changes during this period are not as great as those during the 1997 Asian crisis period, indicating that the 2008 global crisis had a
lesser influence on the stock returns and exchange rates of the Asian emerging markets than the former crisis did. The changes in in-
terest rates are negative in most of the countries for all the subsample periods, reflecting the fact that capital inflow into the Asian
emerging markets lowers interest rates. However, the changes in interest rates show greater volatility during the crisis periods, sug-
gesting governments are eager to use this as a policy tool to ease the crisis and stimulate economic growth during such times. From
panel D it can be seen that the volatility of changes in foreign reserves is greater during the market liberalization and the 1997 Asian
crisis periods than during the tranquil period, indicating that intervention was highly used by the central banks of the focal countries
during these times, whilst the policy of intervention cannot be distinguished during the 2008 global crisis period as the changes in
foreign reserves during this period were not as volatile as those in the market liberalization and the 1997 Asian crisis period.

3.2. Unit root tests

Before proceeding with the co-integration and causality analysis, I test the stationarity status for all the variables so as to de-
termine their order of integration. Perron (1989) showed that the ability to reject a unit root decreases when the stationary al-
ternative is true and an existing structural break is ignored. Subsequent papers modified the unit root test to allow for one or
two endogenous structural breaks (see Zivot and Andrews, 1992; Lumsdaine and Papell, 1997.) However, Nunes, Newbold, and
Kuan (1997) and Lee and Strazicich (2001) provided evidence that assuming no break under the null in the aforementioned en-
dogenous break tests causes the test statistic to diverge and leads to significant rejections of the unit root null, when the data-
generating process is a unit root with break(s). Hence, to obtain more precise unit root testing results, I employ the test based on
the Lagrangian multiplier (LM) principle developed by Lee and Strazicich (2003), which is very flexible as it can be applied when a
structural break occurs at a different time period under unit root null as well as allowing for the structural break to be endogenously
determined by data. Therefore, I apply a LM unit root test with structural breaks and a LM test with no structural break as comparison.

3.2.1. LM test with no structural break

To illustrate the underlying model and testing procedure, I suppose that the data yt, t = 1,2,.......,T, is generated as:

yt ¼ xt þ zt ;xt ¼ ϕxt−1 þ ε t ;zt ¼ γ1 þ γ2 t: ð1Þ

The unit root test consists of testing the null hypothesis of unit roots ϕ = 1. To do so, I express yt as:

Δyt ¼ βyt−1 −βγ 1 þ ½1−βðt−1Þγ 2 þ εt ; t ¼ 1; 2; :::::::; T; ð2Þ

where β = − (1 − ϕ). We then have the null hypothesis:

H0. β = 0,

against the alternatives:

H1. β b 0,

2
Here I define March 2008 as the starting point for the 2008 global crisis period, as in this month the investment bank Bear Stearns collapsed. Following this,
several major institutions either failed, were acquired under duress, or were subject to government takeover, including: Lehman Brothers, Merrill Lynch, Fannie
Mae, Freddie Mac, Washington Mutual, Wachovia, and AIG..
 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172 165

Suppose that the error terms εt, are independent normal variables with mean zero and variance σ 2. Let LMT be the LM statistic
for the time series, and the critical values for the LM test, with no structural breaks, are tabulated in Schmidt and Phillips (1992).

3.2.2. LM unit root test with structural breaks

In this section I define the LM unit root test in the presence of structural breaks. Suppose structural shift occurs at time period
TB in time series. Therefore, the data yt, t = 1,2,.......,T, are generated as:

yt ¼ xt þ zt ;xt ¼ ϕxt−1 þ ε t ;zt ¼ γ1 þ γ2 t þ δDt ð3Þ

where Dt = 1 for t ≥ TB + 1, and 0 otherwise. Another model setting allows for structural breaks shifts in level and trend, so that the
data generating process can be written as:

yt ¼ xt þ zt ;xt ¼ ϕxt−1 þ ε t ;zt ¼ γ1 þ γ2 t þ δDt þ λDT t ð4Þ

where DTt = t − TB for t ≥ TB + 1, and 0 otherwise. According to Lee and Strazicich (2003), the LM unit root test statistics can be
obtained. In this study, I adopt the two-break models 3 for level shift only (model A) and shifts in level and trend (model C) of
these authors and the critical values for these models are tabulated in Lee and Strazicich (2003).
Table 2 shows the results for the unit root test based on the LM with no structural break as well as those for the LM two-
structural break procedure. Panel A shows the LM test results with no structural break, indicating that except for exchange
rates and foreign reserves for Taiwan and Thailand the unit root null at the 5% significance level is rejected, the other variables
for the sample countries fulfill the unit root feature. In Panel B, for Model A, which allows for two shifts in level, the results of
the LM test lead to the rejection of the unit root null at the 5% significance level for exchange rates for all countries and for foreign
reserves in Korea and Taiwan, but the unit root null for stock prices and interest rates of in all cases and the foreign reserves in:
India, Indonesia, the Philippines and Thailand, cannot be rejected. Therefore, the determination of the order of integration for the
stock prices, the exchange rates and the interest rates of the sample countries in Model A are I(1), I(0) and I(1), respectively. In
addition, the determination of the order of integration for the foreign reserves in Korea and Taiwan are I(0), whereas those in
India, Indonesia, the Philippines and Thailand are I(1). For Model C, which includes two changes in level and trend, the outcomes
from the LM test allow for the rejection of the unit root null for all variables of the sample countries at the 5% level. As a result, the
determination of the order of integration for all variables of the sample countries in Model C is all stationary.

3.3. Bounds test for co-integration

Having determined the order of integration for each series, I proceed to the co-integration analyses of the variables. Given the
fact that a set of sample series in LM unit root test with no structural break and with breaks (Model A) are not integrals of the
same order, the commonly used test, the residual-based co-integration test of Engle and Granger (1987) and the VAR-based
tests of Johansen (1988) and Johansen and Juselius (1990) are inapplicable for analyzing the long run relationship among vari-
ables. Therefore, I consider alternative modeling strategies so as to resolve the order of integration issue for the series and the
autoregressive distributed lag (ARDL) model, or bounds testing approach, proposed by Pesaran et al. (2001) is employed, because
it is able to provide a solution to this problem. That is, the bounds test allows for a mixture of I(1) and I(0) variables as regressors,
in other words, the order of integration of the relevant variables does not necessarily have to be the same.
To derive the preferred model, I follow the assumptions made by Pesaran et al. (2001) in Case V, that is, unrestricted intercepts and
unrestricted trends, so as to be able to write down the model as a general vector autoregressive (VAR) model of order p, in zt:
X
p
zt ¼ β þ ct þ φi zt−i þ εt ; t ¼ 1; 2; 3; …; T ð5Þ
i¼1

with β representing a (k + 1) vector of intercepts (drift) and c denoting a (k + 1) the vector of trend coefficients. Pesaran et al.
(2001) further derived the following vector equilibrium correction model (VECM) corresponding to (5):

X
p
Δzt ¼ β þ ct þ Πzt−1 þ Γ i Δzt−i þ εt ; t ¼ 1; 2:::::; T ð6Þ
i¼1

P
p P
p
where the (k + 1) × (k + 1) matrices Π ¼ Ikþ1 þ Ψi and Γ i ¼ − Ψj ; i ¼ 1; 2; ::::; p−1 contain the long-run multipliers and
i¼1 j¼iþ1
short-run dynamic coefficients of the VECM. zt is the vector of the dependent variableytand the regressors xt.
The bounds testing approach is used to test for the existence of a long-run relationship among the variables and this is
achieved by conducting an F-test for the joint significance of the coefficients of the lagged levels of the variables, i.e., H0 : Π = 0
against the alternative HA : Π ≠ 0. Two asymptotic critical values bounds provide a test for co-integration when the independent
variables are I(d) (where 0 ≤ d ≤ 1): a lower value assuming the regressors are I(0) and an upper value assuming purely I(1)

3
As my sample period is from Jan. 1986 to Dec. 2010, covering market liberalization and several financial crises, I adopt this multiple structural-break unit root
test in this study rather than LM test with one structural-break proposed by Lee and Strazicich (2004).
166 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172

Table 2
LM unit root tests.

India Indonesia Korea Philippines Taiwan Thailand

Panel A: LM test with no structural break

Stock prices
β 0.0003 − 0.0702 − 0.0773 0.0000 − 0.0948 − 0.0267
(0.9738) (− 0.6009) (− 0.8729) (0.0895) (− 0.9284) (− 0.4654)
Exchange rates
β − 0.0154 − 1.1784 0.0102 − 1.3477 − 4.8829⁎ − 2.4742⁎
(− 0.9262) (− 2.1520) (0.6339) (− 2.5051) (− 5.8063) (− 3.1942)
Interest rates
β − 0.0125 − 0.3012 − 0.2834 0.0068 − 0.3089 − 0.2979
(− 0.7463) (− 2.2977) (− 2.2945) (0.3023) (− 2.3443) (− 2.2999)
Foreign reserves
β 0.0000 − 0.08 0.0000 − 0.1825 − 5.5356⁎ − 3.7912⁎
(0.3545) (− 0.9217) (− 0.0582) (− 1.3984) (− 7.982) (− 6.4547)

Panel B: LM test with two structural breaks (Model A)

Stock prices
β − 0.0156 − 0.1469 − 0.1466 − 0.0007 − 0.1471 − 0.1471
(− 1.9608) (− 3.7108) (− 3.7153) (− 2.0499) (− 3.7225) (− 3.7115)
Exchange rates
β − 0.1892⁎ − 4.5324⁎ − 0.1931⁎ − 3.2551⁎ − 0.5359⁎ − 10.9832⁎
(− 7.2457) (− 17.4259) (− 4.8147) (− 11.517) (− 6.8334) (− 14.6978)
Interest rates
β − 0.1132 − 0.3717 − 0.4025 − 0.1329 − 0.357 − 0.3497
(− 3.0627) (− 3.0536) (− 3.1963) (− 3.1628) (− 3.2347) (− 3.184)
Foreign reserves
β − 0.0156 − 0.1467 − 0.4975⁎ − 0.0141 − 0.5219⁎ − 0.1461
(− 1.9659) (− 3.7101) (− 4.3852) (− 1.7659) (− 4.851) (− 3.7033)

Panel C: LM test with two structural breaks (Model C)

Stock prices
β − 1.579⁎ − 2.2877⁎ − 2.2823⁎ − 0.8701⁎ − 2.256⁎ − 2.2934⁎
(− 23.2585) (− 340.819) (− 344.53) (− 17.5584) (− 304.916) (− 328.786)
Exchange rates
β − 12.0875⁎ − 6.6821⁎ − 1.5897⁎ − 16.7906⁎ − 3.012⁎ − 2.7469⁎
(− 31.3216) (− 54.0822) (− 25.1343) (− 37.4929) (− 29.6162) (− 27.1121)
Interest rates
β − 0.7606⁎ − 1.6978⁎ − 1.8133⁎ − 1.0384⁎ − 1.7339⁎ − 1.7782⁎
(− 12.3103) (− 18.5384) (− 20.6165) (− 10.8674) (− 19.6404) (−20.0363)
Foreign reserves
β − 1.5754⁎ − 2.2895⁎ − 2.319⁎ − 0.8677⁎ − 2.2844⁎ − 2.2849⁎
(− 23.22) (− 353.303) (− 356.17) (− 17.5284) (− 319.814) (− 366.348)

Note: the numbers inside the brackets represent the LM unit root test statistics. Critical values for the LM test with no structural breaks can be taken from Schmidt
and Phillips (1992) and critical values for the one-break and two-break models A and C are tabulated in Lee and Strazicich (2004) and Lee and Strazicich (2003),
respectively.
⁎ Denotes statistical significance at the 5% level to reject the unit root null hypothesis.

regressors. If the F-statistic is above the upper critical value, the null hypothesis of no long-run relationship can be rejected, irre-
spective of the orders of integration for the time series, whereas conversely, if the test statistic falls below the lower critical value,
the null hypothesis cannot be rejected. Finally, if the statistic falls between the lower and upper critical values, the result is incon-
clusive. The computed F-statistic value is compared with the critical values tabulated in table CI(v) of Pesaran et al. (2001).
As the whole sample period contains structural breaks, such as asset market liberalization and financial crises, that may alter
the long-run relationship among the exchange rate, stock price, interest rate and foreign reserves, I undertake the bounds tests for
four subsamples: the market liberalization period, the 1997 Asian crisis period, the subsequent tranquil period and the 2008 glob-
al crisis period. Table 3 reports the results of the calculated F-statistics when exchange rate and stock price, respectively, are con-
sidered as dependent variables (normalized) in the ARDL-OLS regressions. 4
Panel A shows that for the full sample period the null hypothesis of no co-integration cannot be rejected at the 5% significance
level, for all the countries of interest. The findings are consistent with the results of past literature that no long-run co-integration
relationships between exchange rates and stock prices exist. However, the subsample results tell a different story. In this regard,
although a long-run co-integration relationship cannot be found either during the market liberalization period or the tranquil pe-
riod, such relationships did exist amongst variables in several countries during the crisis periods. That is, during the 1997 Asian
crisis, these are found amongst the variables when the regressions are normalized on exchange rates in Indonesia and the Phil-
ippines and on stock price in India. Moreover, during the 2008 global crisis period, they can be found in Indonesia when the

4
Based on the “flow-oriented” and “stock-oriented” models of exchange rates, I use exchange rate and stock price as the dependent variables.
 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172 167

Table 3
Bounds test for co-integration analysis.

Dep. Var. India Indonesia Korea The Philippines Taiwan Thailand

Panel A: full sample period (1986/1–2010/12)

F(EX|Stock, Interest rates, Reserve) 2.5670 1.3767 1.2237 0.4951 2.3547 0.1527
F(Stock|EX, Interest rates, Reserve) 2.7936 0.6698 2.5215 1.1014 1.3015 2.6274

Panel B: market liberalization period (1986/1–1997/6)

F(EX|Stock, Interest rates, Reserve) 0.7989 0.5507 4.7381 0.6504 3.3682 0.5921
F(Stock|EX, Interest rates, Reserve) 2.6186 2.5255 0.9974 0.8348 1.4860 1.1492

Panel C: 1997 Asian financial crisis period (1997/7–1999/7)

F(EX|Stock, Interest rates, Reserve) 0.8219 66.2375⁎ 1.7778 5.8896⁎ 2.6179 0.1069
F(Stock|EX, Interest rates, Reserve) 7.9028⁎ 1.5911 0.5042 0.2503 0.5711 2.6515

Panel D: Tranquil period (1999/8–2008/2)

F(EX|Stock, Interest rates, Reserve) 0.9598 0.2990 1.1642 1.0878 2.7725 0.7811
F(Stock|EX, Interest rates, Reserve) 3.0388 1.7653 1.8966 1.9788 0.8553 0.3645

Panel E: 2008 global crisis period (2008/3–2010/12)

F(EX|Stock, Interest rates, Reserve) 2.1793 4.7105 4.1123 0.4437 0.8317 2.5496
F(Stock|EX, Interest rates, Reserve) 0.5135 11.054⁎ 0.7303 0.3000 1.3934 1.6444

Notes: Critical values are cited from Pesaran et al. (2001), Table CI(v), Case V: Unrestricted intercept and unrestricted trend. Lower bound I(0) = 4.87 and upper
bound I(1) = 5.85, at the 5% significance level.
⁎ Represents co-integration exists at the 5% significance level.

regressions are normalized on stock price. The results imply that long-run relationships among the variables of interest are more
inclined to occur during crisis periods than tranquil ones. More specifically, the spillover effect between the foreign exchange
market and the stock market during the crisis period in: India, Indonesia and the Philippines would have long-run influence on
both stock and foreign exchange markets.

3.4. Causality analysis

This section investigates the short-run interactions between the variables using Granger causality models and incorporating
the co-integration results obtained previously. The absence of co-integration between the exchange rates and the stock prices
suggests the suitability of using standard Granger causality tests for the purpose, whereby the directions of causation maybe ex-
amined based on the following equation:

X
k1 X
k2
Δspt ¼ α þ δi Δspt−i þ φi Δext−i þ ϕSPREADt−1 þ κASIAt−1 þ εt ð7Þ
i¼1 i¼1

where sp is the stock price measure and ex is an exchange rate measure. As capital flows to a country are suggested by interna-
tional finance theory as being influenced by both international interest rates and financial sector liberalization, I particularly in-
corporate two external variables, SPREAD as the interest rate differential between local interest rates and U.S. interest rates, and
ASIA as the return on an Asian stock index (excluding Japan), to control for the impact of capital flows on the dynamic relation
between stock prices and exchange rates. From the equation, the null hypothesis of no causation from ex to sp, ∑φ ¼ 0; can
be tested using standard F tests. The reverse causation from sp to ex may also be evaluated by reversing the role of sp and ex
in the equation. From the tests, four alternative patterns of causality may be observed: (i) unidirectional causality from ex to
sp, (ii) unidirectional causality from sp to ex, (iii) bi-directional causality, and (iv) no causality.
For the co-integration case, the causality model can be expressed as the following error correction model of ARDL (k1, k2, k3,
k4):

X
k1 X
k2 X
k3 X
k4
Δspt ¼ α þ δi Δspt−i þ φi Δext−i þ θi Δ intt−i þ λi Δrest−i þ γASIAt−1 þ υecmt−1 þ εt : ð8Þ
i¼1 i¼1 i¼1 i¼1

where int is the interest rates, res is the foreign reserves and ecm is the error correction term derived from the long-run co-
integrating relationship. Additionally, I impose ASIA, return on an Asian stock index (excluding Japan), as a control variable in
the equation. For the equation Δext works as the dependent variable, I also add change in the consumer price index as an inflation
control variable, because changes in exchange rates are expected to be affected by inflation suggested by purchasing power parity
(PPP). The ecm term, representing the residuals from the co-integrating regression, is included because the variables are found to
be co-integrated. From the equation, two channels of causation may be noted, with the first relating to the standard Granger tests
that evaluate the joint significance of the coefficients of the lagged independent variables. The second is the adjustment of the
dependent variable to the lagged deviations from the long-run equilibrium path, as represented by the ecm term. If the coefficient
168 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172

of this term is significant, it means that the dependent variable adjusts towards its long-run level. In the implementation of
Eqs. (7) and (8) we use the Schwarz Bayesian Criterion (SBC) to determine the lag lengths of the right-hand-side variables.
The causality test results are given in Table 4. Panel A shows the causality results for the full sample period, in which it can be
observed that the direction of causation: is bi-directional for India, Indonesia and Korea, is unidirectional from the stock to the
foreign exchange market for the Philippines and Thailand, and is non-causal for Taiwan. However, the results from the subsample
analysis are rather interesting in that the comovement between stock and foreign exchange markets is stronger during the crisis
periods than during those that are tranquil. In the Granger sense, the results show that the stock prices were causally linked to
exchange rates in the Philippines during the 1997 Asian crisis period as well as in Korea and Thailand during the 2008 global crisis
period. In addition, during the latter time the exchange rates were causally linked to stock prices in India, and there was bi-
directional causality in Indonesia, whilst all countries except Thailand show that a non-causal relationship existed between ex-
change rates and stock prices during the market liberalization and tranquil periods. These results indicate that the Asian emerging
markets are generally not efficient, information wise, during crisis periods, as there exists a lead-lag relation between stock and for-
eign exchange markets. If they are aware of this information inefficiency in markets, governments can effectively alleviate currency/
stock crisis by maintaining the stability of stock/foreign exchange markets. Most of the causation is found to be from stock prices to
exchange rates during the crisis periods in the Asian emerging markets, consistent with the argument proposed by Goldstein,
Kaminsky and Reinhart (2000) that: the slowdown of an economy affects stock prices, prompting international investors to withdraw
their capital and putting downward pressure on the currency. In order to prevent currency crisis, governments should first stimulate
economic growth and the stock markets to attract capital inflow.
The statistically significant coefficients of the error correction term in India and the Philippines during the 1997 Asian crisis
period and in India during the 2008 global crisis period, which represents another channel of causality, substantiate the earlier
findings of comovement between stock and foreign exchange markets. For example, during the 1997 Asian crisis period, at the
5% significance level, approximately 25% of disequilibria from the long-run relationship in the Philippines were corrected the
next month by adjustments in stock return. Although I find no short-run causation from the exchange rates to stock prices,
they are related in the long-run, in that stock prices react to any disturbances to the relationship. Moreover, the results from
the error coefficients suggest the adjustment of the exchange rates in the next month would correct about 62.44% of the devia-
tions from the long-run equilibrium level.

Table 4
Causality analysis results.

Country India Indonesia Korea The Philippines Taiwan Thailand

Panel A: Granger F tests for the full sample period (1986/1–2010/12)

EX dnc Stock 1.6999⁎ 2.0804⁎ 3.1454⁎ 0.952 0.3945 1.5482
Stock dnc EX 1.8562⁎ 1.9698⁎ 3.2518⁎ 1.997⁎ 0.6567 3.4254⁎

Panel B: Granger F tests for market liberalization period (1986/1–1997/6)

EX dnc Stock 1.5889 0.1467 1.2265 1.4533 0.6553 0.5922
Stock dnc EX 1.6747 0.4843 0.9094 1.3005 0.8773 2⁎

Panel C: 1997 Asian crisis period (1997/7–1999/7)

(a) Granger F tests
EX dnc Stock 1.687 0.4285 1.3053 0.031 1.745 0.4168
Stock dnc EX 3.5176 1.2094 0.5391 12.2617⁎ 0.9098 1.3503
(b) Error correction coefficient of equation
EX 3.1665⁎ − 0.2188 – − 0.6244⁎ – –
Stock −1 − 0.2184 – − 0.2499⁎ – –
Reserve 2.5679⁎ − 1.7136 – − 0.4724⁎ – –
Interest rate 0.0329 0.1031 – − 0.2965⁎ – –

Panel D: Granger F tests for the Tranquil period (1999/8–2008/2)

EX dnc Stock 0.6731 0.9202 1.4812 1.2287 0.4807 1.0694
Stock dnc EX 0.4924 0.8324 1.1715 0.9097 0.794 0.7486

Panel E: 2008 global crisis period (2008/3–2010/12)

(a) Granger F tests
EX dnc Stock 5.0383⁎ 81.0590⁎ 0.5362 1.1813 0.1235 1.5145
Stock dnc EX 1.4294 2.9089⁎ 4.958⁎ 1.3447 2.6818 3.0877⁎
(b) Error correction coefficient of equation
EX – − 2.1344⁎ – – – –
Stock – − 1.7628⁎ – – – –
Reserve – 1.7131⁎ – – – –
Interest rate – − 1.066⁎ – – – –

Note: dnc = does not cause.

⁎ Denotes significance at the 5% confidence interval.
 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172 169

Table 5
Bounds test for co-integration analysis for different industries.

Indonesia Korea The Philippines Taiwan Thailand

Panel A: full sample period (1992/1–2010/12)

F(EX|BM, Interest rates, Reserve) 0.1970 1.5166 4.9591 0.2282 0.5876
F(BM|EX, Interest rates, Reserve) 1.0083 0.1732 3.7056 2.8265 0.7005
F(EX|CG, Interest rates, Reserve) 0.6555 1.1271 3.0939 0.1779 0.2945
F(CG|EX, Interest rates, Reserve) 0.8647 0.9909 1.0984 2.8956 1.4529
F(EX|IND, Interest rates, Reserve) – 1.3765 1.5486 0.5178 0.3582
F(IND|EX, Interest rates, Reserve) – 0.3617 3.9953 3.5856 1.0633
F(EX|TECH, Interest rates, Reserve) – 1.3708 – 0.3569 0.1733
F(TECH|EX, Interest rates, Reserve) – 1.4718 – 1.4694 1.0346

Panel B: market liberalization period (1992/1–1997/6)

F(EX|BM, Interest rates, Reserve) 1.1569 1.0184 1.1821 0.9173 4.148
F(BM|EX, Interest rates, Reserve) 0.3419 2.9507 0.6325 1.4843 0.2843
F(EX|CG, Interest rates, Reserve) 0.175 0.3387 2.4111 0.6723 5.251
F(CG|EX, Interest rates, Reserve) 0.4602 1.1252 0.2154 2.2630 1.3636
F(EX|IND, Interest rates, Reserve) 0.0481 1.0212 3.7893 0.6987 1.6679
F(IND|EX, Interest rates, Reserve) 5.412 2.8552 0.0963 1.7862 1.1709
F(EX|TECH, Interest rates, Reserve) – 0.0877 – 0.6153 0.6569
F(TECH|EX, Interest rates, Reserve) – 4.0150 – 1.5927 0.0598

Panel C: 1997 Asian crisis period (1997/7–1999/7)

F(EX|BM, Interest rates, Reserve) 1.0581 4.1286 4.6173 0.7987 2.5985
F(BM|EX, Interest rates, Reserve) 2.5862 1.1119 5.9905⁎ 3.4223 0.4806
F(EX|CG, Interest rates, Reserve) 4.1899 0.2513 10.7198⁎ 1.0733 10.353⁎
F(CG|EX, Interest rates, Reserve) 2.2603 1.8962 0.1159 2.5501 0.3158
F(EX|IND, Interest rates, Reserve) 0.6845 0.5612 5.3048 1.6181 180.6133⁎
F(IND|EX, Interest rates, Reserve) 5.0483 0.3585 0.3103 1.8063 0.7057
F(EX|TECH, Interest rates, Reserve) 1.8649 0.4633 – 0.0939 15.6591⁎
F(TECH|EX, Interest rates, Reserve) 27.2516⁎ 2.6478 – 2.6847 0.3230

Panel D: the Tranquil period (1999/8–2008/2)

F(EX|BM, Interest rates, Reserve) 0.1619 1.3594 1.9423 2.3744 0.5220
F(BM|EX, Interest rates, Reserve) 0.2803 0.1885 0.4468 1.1065 0.2550
F(EX|CG, Interest rates, Reserve) 0.1461 1.2863 1.9066 3.1139 0.3703
F(CG|EX, Interest rates, Reserve) 1.3164 1.9881 0.9414 0.4900 1.1312
F(EX|IND, Interest rates, Reserve) – 1.2726 0.9001 3.0518 0.6002
F(IND|EX, Interest rates, Reserve) – 0.9500 3.7579 0.4389 2.6763
F(EX|TECH, Interest rates, Reserve) – 1.8309 – 2.7118 1.3022
F(TECH|EX, Interest rates, Reserve) – 0.7925 – 0.8675 0.1778

Panel E: 2008 global crisis period (2008/3–2010/12)

F(EX|BM, Interest rates, Reserve) 1.6755 1.1451 0.4761 2.1559 1.0244
F(BM|EX, Interest rates, Reserve) 7.5199⁎ 1.2204 0.1602 3.1692 1.0033
F(EX|CG, Interest rates, Reserve) 1.8623 0.7289 0.1135 2.0687 1.4725
F(CG|EX, Interest rates, Reserve) 4.8554 1.7303 0.8631 1.9643 0.2829
F(EX|IND, Interest rates, Reserve) – 0.9374 0.7782 1.9873 0.9517
F(IND|EX, Interest rates, Reserve) – 0.8702 0.2766 0.6558 0.8418
F(EX|TECH, Interest rates, Reserve) – 0.2708 – 3.1691 1.2549
F(TECH|EX, Interest rates, Reserve) – 1.4474 – 0.5700 0.6890

Notes: The numbers represent F-statistics for the bounds test. BM, CG, IND and TECH represent the sector indexes of: basic materials, consumer goods, industrials
and technology, respectively. Critical values are cited from Pesaran et al. (2001), Table CI(v), Case V: Unrestricted intercept and unrestricted trend. Lower bound I
(0) = 4.87 and upper bound I(1) = 5.85 at the 5% significance level.
⁎ Denotes that there exists co-integration as the F-statistic is higher than the upper bound of 5.85.

4. Industry analysis

Next, I investigate if the relationship between exchange rates and the stock prices varies across different industries. The interest
regarding this is to examine whether causality might be observed more commonly in such export-oriented industries as the indus-
trials and technology industries, as compared with the basic materials and consumer goods industries, because the former are
more inclined to be exposed to major institutional changes, such as market liberalization and financial crises. Thus, I select the follow-
ing sector indexes of the Asian emerging markets to address the question: industrials, technology, basic materials and consumer
goods and the data for the sample countries is collected from the Dow Jones Indexes database. However, owing to data availability,
the industry analysis is restricted to: Indonesia, Korea, the Philippines, Taiwan and Thailand, 5 starting from January 1992.

5
Industrials and technology sector indexes of Indonesia are only available for the periods from Jan. 1992 to Jul. 1999 and for the 1997 Asian crisis period, re-
spectively. The technology sector index of the Philippines is not available for the whole sample period.
170 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172

Table 6
Industry causality analysis.

Country Indonesia Korea The Philippines Taiwan Thailand

Panel A: Granger F tests for the full sample period (1992/1–2010/12)

EX dnc BM 1.1808 2.9047⁎ 0.7109 1.1712 0.5429
BM dnc EX 1.2088 2.3676⁎ 2.0347⁎ 2.9536⁎ 1.5977⁎
EX dnc CG 3.0998⁎ 3.5163⁎ 0.9796 1.2148 1.0172
CG dnc EX 1.76 1.8885⁎ 1.941⁎ 4.4069⁎ 0.785
EX dnc IND 1.2145 2.9487⁎ 2.1232⁎ 1.9924⁎ 0.731
IND dnc EX 2.2675⁎ 3.1566⁎ 1.2101 4.7958⁎ 0.9994
Ex dnc TECH – 2.5437⁎ – 1.7048 1.3228
TECH dnc EX – 2.7545⁎ – 4.2706⁎ 2.0595⁎

Panel B: Granger F tests for the market liberalization period (1992/1–1997/6)

EX dnc BM 0.8496 0.6668 2.0735 2.0999 0.3032
BM dnc EX 1.3614 1.4056 4.5066⁎ 0.9859 2.5281⁎
EX dnc CG 0.8063 0.6711 2.4171⁎ 0.9689 0.5573
CG dnc EX 1.223 1.9901 0.8995 0.6322 2.1326
EX dnc IND 1.3646 0.4924 1.5808 3.108⁎ 0.6056
IND dnc EX 0.3391 2.5136⁎ 1.4586 0.7943 2.248
Ex dnc TECH – 1.6016 – 0.3079 0.7263
TECH dnc EX – 1.3946 – 0.7145 2.5439⁎

Panel C: 1997 Asian crisis period (1997/7–1999/7)

(a) Granger F tests for BM sector
EX dnc BM 0.514 2.394 0.3677 0.1357 0.6125
BM dnc EX 0.0663 0.5992 0.1247 0.7387 1.5976
(b) Error correction coefficient of equation for BM sector
EX – – –1.1192⁎ – –
BM – – –0.396⁎ – –
reserve – – 0.4844 – –
Interest rate – – –0.4939 – –
(c) Granger F tests for CG sector
EX dnc CG 0.9199 1.6196 0.8274 0.3382 0.3127
CG dnc EX 0.0938 0.1347 28.2848⁎ 0.4919 151.658⁎
(d) Error correction coefficient of equation for CG sector
EX – – –0.0376 – 0.1274
CG – – 0.186 – − 0.4825
reserve – – –0.4469 – 2.4293
Interest rate – – 0.4012 – − 0.1141
(e) Granger F tests for IND sector
EX dnc IND 1.7339 1.9299 0.3659 0.1931 0.936
IND dnc EX 1.8616 0.4325 34.7102⁎ 0.9942 39.1133⁎
(f) Error correction coefficient of equation for IND sector
EX – – 0.2087 – −1
IND – – 0.4232⁎ – − 0.1019
reserve – – − 0.2046⁎ – − 1.2424⁎
Interest rate – – 0.288⁎ – − 0.0601
(g) Granger F Tests for TECH sector
EX dnc TECH 27.9373⁎ 0.282 – 1.2283 1.1929
TECH dnc EX 0.9619 0.4488 – 0.6743 13.3695⁎
(h) Error correction coefficient of equation for TECH sector
EX 1.7975⁎ – – – − 0.0326
TECH − 1.1671⁎ – – – 0.3439
reserve 3.163⁎ – – – 0.0962
Interest rate 0.2105 – – – − 0.2035

Panel D: Granger F tests for the Tranquil period (1999/8–2008/2)

EX dnc BM 0.2031 1.3746 0.7885 0.8053 0.6727
BM dnc EX 0.8002 1.9154⁎ 0.6104 0.749 0.8608
EX dnc CG 1.1656 1.2507 1.1593 1.4872 0.7222
CG dnc EX 0.8487 1.6072 1.5251 1.5753 0.7952
EX dnc IND 1.6103 1.3506 1.6438 1.2387 1.2387
IND dnc EX 0.7605 1.2623 0.488 0.484 0.484
Ex dnc TECH – 1.3044 – 1.3185 0.3228
TECH dnc EX – 2.0576⁎ – 0.9653 0.4818

Panel E: 2008 global crisis period (2008/3–2010/12)

(a) Granger F tests for BM sector
EX dnc BM 12.0564⁎ 1.1829 1.0265 0.8837 2.3321
 C.-H. Lin / International Review of Economics and Finance 22 (2012) 161–172 171

Table 6 (continued)

Country Indonesia Korea The Philippines Taiwan Thailand

BM dnc EX 2.93⁎ 3.3768⁎ 1.0294 3.286⁎ 2.5272

(b) Error correction coefficient of equation for BM sector
EX − 1.6695⁎ – – – –
BM −1 – – – –
reserve 2.1452⁎ – – – –
Interest rate –1.6251⁎ – – – –
(c) Granger F tests for CG, IND and TECH sector
EX dnc CG 1.1432 0.983 1.7671 2.7744 0.6297
CG dnc EX 3.5132⁎ 2.4495 2.0199 4.3749⁎ 2.1248
EX dnc IND 9.4514⁎ 1.0753 2.3882 0.9451 0.4008
IND dnc EX 7.8204⁎ 7.4569⁎ 1.4144 2.3872 1.7502
Ex dnc TECH – 2.0746 – 4.7628⁎ 0.2576
TECH dnc EX – 1.4689 – 6.3033⁎ 2.5633

Note: BM, CG, IND and TECH represent the sector indexes of: basic materials, consumer goods, industrials and technology, respectively. dnc = does not cause.
⁎ Denotes significance at the 5% confidence interval.

I redo bounds tests and causality analysis for the four sector indexes of the Asian emerging markets and present the results in
Tables 5 and 6. In Table 5, only some industries in Indonesia, the Philippines and Thailand during the 1997 Asian and 2008 global
crisis period show the computed F-statistics higher than the upper bound critical value 5.85 at the 5% level. However, the long-run
co-integration relationships among the variables occurring during the crisis periods cannot generalize to specific industries. The
industry causality analysis in Table 6 shows that overall for most of the sample countries, the causation is observed from stock to
foreign exchange markets and is clustered during the market liberalization and 1997 and 2008 crisis periods. However, the
comovement between exchange rates and stock prices cannot be attributed to the specific industries, thus appearing to refute
the intuition that stronger linkage between stock prices and exchange rates would occur within the export-oriented industries.
The possible interpretation for this finding could be attributed to the comovement effect between exchange rates and stock prices
being driven by international investment capital flows, rather than international trade flows, thus causing the indistinguishable
results from between the two focal industrial types.

5. Conclusion

This study has investigated the comovement between exchange rates and stock prices in the Asian emerging markets. I chose
to include major institutional changes in these markets, in form of market liberalization and financial crises, in the sample, so as to
examine how the short-term and long-term relations change after such events. To do so, I adopted the autoregressive distributed
lag (ARDL) model proposed by Pesaran et al. (2001), which allows us to deal with structural breaks easily and to handle data that
have integrals of different orders. Two additional variables, interest rates and foreign reserves were included in the exchange
rate-stock price analysis to capture the effect of portfolio adjustment and policy intervention. The multivariate contexts helped
to reduce potential omitted variable bias that could have arisen in the bivariate case.
My empirical results have suggested that the comovement between exchange rates and stock prices becomes stronger during
crisis periods than during tranquil ones, in terms of long-run co-integration and short-run causality, which is consistent with con-
tagion or spillover between exchange rates and stock prices during the former type of period. Furthermore, it emerged that most
spillovers can be attributed to the channel running from stock price shocks to exchange rates, concurring the argument that the
slowdown of an economy affects stock prices, subsequently prompting international investors to withdraw their capital, thus put-
ting downward pressure on the currency. In order to prevent currency crisis, governments should stimulate economic growth and
stock markets to attract capital inflow. I further investigated if the comovement between exchange rates and stock prices varies
across different industries. However, the industry causality analysis showed that the comovement is not stronger for export-
oriented industries, such as industrials and technology industries. This implies that the comovement between exchange rates
and stock prices in the Asian emerging markets is generally driven by the capital account balance rather than that of trade.

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