AUTHORS: Tzu-Kuang Hsu

Download as PDF

ABSTRACT: This paper uses an innovative method through combining autoregressive distributed lag model and a quantile regression, called a quantile autoregressive distributed lag model, to examine the dynamic long-run equilibrium and short-run causal relationship between the stock price of China and the RMB/USD exchange rate from January 1994 to June 2016. The results indicate that there is long-run cointegration relationship between the stock price of China and the RMB/USD exchange rates at lower and higher distributions of exchange rates. The causality results show that there is unidirectional causality running from the RMB/USD exchange rate to China stock price at lower and higher distributions of stock prices. The result shows that there is evidence in favor of the goods market hypothesis in China.

KEYWORDS: Exchange rates, Stock prices, Autoregressive distributed lag model, A quantile regression, China, Cointegation

REFERENCES:

[1] Ajayi, R. A., Friedman, J. & Mehdian, S. M. On the Relationship between Stock Returns and Exchange Rates: Tests of Granger Causality. Global Finance Journal, Vol.9, No.2, 1998, pp.241–51.

[2] Cao, G. Time-Varying Effects of Changes in the Interest Rate and the RMB Exchange Rate on the Stock Market of China: Evidence from the Long‑ Memory TVP‑ VAR Model. Emerging Markets Finance & Trade. Vol.48, No.2, 2012, pp.230–248.

[3] Chkili, W. & Nguyen, D. K. Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries. Research in International Business and Finance. Vol.31, 2014, pp.46–56.

[4] Engle, R. F. & Granger, C. W. J. Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, Vol.55, No.2, 1987, pp.251-276.

[5] Granger, C. W. J., Huang, B. N. & Yang, C. W. A Bivariate Causality Between Stock Prices and Exchanges Rates: Evidence From Recent Asian Flu. The Quarterly Review of Economics and Finance, Vol.40, No.3, 2000, pp. 337-354.

[6] Guo, F., Hu, J., & Jiang, M. Monetary shocks and asymmetric effects in an emerging stock market: The case of China. Economic Modeling. Vol.32, 2013, pp.532–538.

[7] Hatemi-J, A. & Roca, E. Exchange Rates and Stock Prices: Interaction During Good and Bad Times: Evidence From the ASEAN4 Countries. Applied Financial Economics, Vol.15, No.8, 2005, pp.39-546.

[8] Ho, L. C. & Huang, C. H. The nonlinear relationships between stock indexes and exchange rates. Japan and the World Economy. Vol.33, 2015, 20–27.

[9] Hsu, T. K. 2016. Exploring Relationship Between the Stock Price of Taiwan and the Exchange Rate: An Autoregressive Distributed Lag Model with a Quantile Regression. International Journal of Economics and Finance, Vol.8, No.1,2016, pp.72-78.

[10] Ibrahim, M. Cointegration and Granger Causality Tests of Stock Price and Exchange Rate Interactions in Malaysia, ASEAN Economic Bulletin, Vol.17, 2000, pp. 36-47.

[11] Johansen, S. Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control, Vol.12, 1988, pp. 231–254.

[12] Johansen, S. & Juselius, K. Maximum likelihood estimation and inference on co-integration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, Vol.52, No.2, 1990, pp.169–210.

[13] Koenker, R., & Bassett, G. Regression Quantile. Econometrica, Vol.46, 1978. Pp.33-49.

[14] Koenker, R., & Hallock, K. Quantile regression. The Journal of Economic Perspective, Vol.15, 2001, pp.143-156.

[15] Koenker, R. Quantile Regression. Econometric Society Monograph Series. Cambridge University Press, 2005.

[16] Liu, L. & Wan, J. 2012. The relationships between Shanghai stock market and CNY/USD exchange rate: New evidence based on cross-correlation analysis, structural cointegration and nonlinear causality test. Physica A. Vol.391, 2012, pp.6051–6059.

[17] Mok, H. Causality of interest rate, exchange rate and stock price at stock market open and close in Hong Kong. Asia Pacific Journal of Management, Vol.10, 1993, pp.123–143.

[18] Nieh, C. C. & Yau, H. Y. The Impact of Renminbi Appreciation on Stock Prices in China. Emerging Markets Finance & Trade. Vol.46, No.1, 2010, pp.16–26.

[19] Pesaran, M. H. 1997. The role of economic theory in modeling the long run. Economics Journal, Vol.107, 1997, pp.178-191.

[20] Pesaran, M. H. & Smith, R. P. Structural analysis of cointegrating VARs. Journal of Economic Surveys, Vol.12, 1998, pp.471-505.

[21] Pesaran, M. H. & Shin, Y. Autoregressive distributed lag modeling approach to cointegration analysis. In Storm, S. edited, Econometrics and economic theory in the 20th Century: the Ragnar Frisch Centennial Symposium, Cambridge University Press, Cambridge, chapter 1, 1999.

[22] Pesaran, M. H., Shin, Y. & Smith, R. J. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, Vol.16, 2001, pp.289-326.

[23] Phylaktis, K. & Ravazzolo, F. Stock prices and exchange rate dynamics. Journal of International Money and Finance. Vol.24, 2005, pp.1031–1053.

[24] Sui, L. & Sun L. Spillover effects between exchange rates and stock prices: Evidence from BRICS around the recent global financial crisis. Research in International Business and Finance. Vol.36, 2016, pp.459–471.

[25] Tian, G. G. & Ma, S. The relationship between stock returns and the foreign exchange rate: the ARDL approach. Journal of the Asia Pacific Economy. Vol.15, No.4, 2010, pp.490–508

[26] Tsai, I. C. The relationship between stock price index and exchange rate in Asian markets: A quantile regression approach. Journal of International Financial Markets, Institution, and Money, Vol.22, No.3, 2012, pp.609-621.

[27] Zhao, H. Dynamic relationship between exchange rate and stock price: Evidence from China. Research in International Business and Finance. Vol.24, 2010, pp.103–112.

WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 14, 2017, Art. #9, pp. 81-86


Copyright © 2017 Author(s) retain the copyright of this article. This article is published under the terms of the Creative Commons Attribution License 4.0