The Relationship Between Stock Prices and Exchange Rates An Empirical

The Relationship Between Stock Prices and Exchange Rates: An Empirical Study on Emerging Markets ¨ Erman Erbaykal* H. Ayd›n Okuyan** Abstract This study aims to determine whether the traditional or portfolio approach is relevant for developing countries, by using the relationship between stock prices and exchange rates. For this purpose, cointegration (Pesaran et al., 2001) and causality tests (Toda Yamamoto, 1995) are used to examine the relationship between stock prices and exchange rates using monthly data from 13 developing countries. There is a negative relationship between the variables in the long-run, in 6 countries. There is a casual relationship in 8 countries, for 5 countries there is uni-directional causality running from stock prices to exchange rate, for 3 countries there is bi-directional causality between the variables. These findings can be interpreted as the relevance of the portfolio approach in the developing countries examined. Key Words: Exchange Rates, Stock Prices, Bounds Test, Toda Yamamoto Causality JEL Classification: F31, E44, C22 ¨ This paper is written in Turkish original. * Lecturer, Department of Economics, Bal›kesir University Band›rma ** Lecturer, Department of Business Administration, Bal›kesir University Band›rma BDDK Bankac›l›k ve Finansal Piyasalar Cilt: 1, Say›: 1, 2007 77