Investigating the dynamic relationships between equity markets and currency markets

This study investigates the panel dynamic relationships between equity markets and currency markets for the four Asian economies over the period January 2001–December 2013 using a panel Granger-causality approach. Over the past 20 years, Japan, South Korea, Singapore, and Taiwan have integrated themselves together with a high degree of globalization in economic and financial relations. Evidences support the flow-oriented hypothesis of exchange rates that indicates that exchange rates influence stock prices positively via the current account for Japan, and document the stock-oriented hypothesis of exchange rates that states that exchange rates affect stock prices negatively via the capital account for the other three countries. The findings for the short-run and long-run panel Granger-causality tests reveal that bi-directional causality exists between the two variables. The empirical results provide important policy implications for the monetary authorities and the mutual fund managers in the equity markets.