The Linkage Between Exchange Rates and Stock Prices: Evidence from Vietnam

Abstract

This study researches the causal relationship between exchange rates and stock prices during pre and post financial crisis in Viet Nam, based on the collected daily data from 2005 to 2015. The paper investigates the long-run relationship between above-mentioned two variables using Johansen and Juselius (1990) co-integration test and short - run dynamic causal relationships by using Toda and Yamamoto (1995) procedure. Variance decompositions (VDCs) analysis expresses the predictable portion of exchange rates (stock prices) changes on the forecast error variance in stock prices (exchange rates). In this study, it was found that exchange rates and stock prices were non-normally distributed. Through unit root test, it was also established that both the time series, exchange rates and stock prices, were stationary at the level form itself. Further investigation into the causal relationship between the two variables using Granger Causality test not only finds a unidirectional causal relationship from stock prices to exchange rates, but also supports the traditional approach in post crisis case.