Stock Prices and Exchange Rates: Are They Related? Evidence from South Asian Countries (Financial Sector) (Report‪)‬

This paper examines whether stock prices and exchange rates are related to each other or not. Both the long-run and the short-run associations between these variables are explored. The study uses monthly data on four South Asian countries, including Pakistan, India, Bangladesh, and Sri Lanka, for the period January 1994 to December 2000. Cointegration, vector error correction modelling technique, and standard Granger causality tests were employed to examine the long-run and short-run associations between stock prices and exchange rates. The results of this study show no short-run association between the said variables for all four countries. There is no long-run relationship between stock prices and exchange rates for Pakistan and India either. However, for Bangladesh and Sri Lanka, there appears to be a bi-directional causality between these two financial variables. The results have implications for investors, policy-makers, and academicians. I. INTRODUCTION