Revisiting Quantile Granger Causality Between the Stock Price Indices and Exchange Rates for G7 Countries

Abstract

The daily data of the stock price index and the foreign exchange rate in G7 were utilized for the period between January 4, 1999 and June 30 2015. From the empirical study of Granger causality test in quantiles, there are three main findings. Firstly, there is no long-run significant relationship between the stock price index and exchange rate in G7. Secondly, different types of short-run relationships exist between the two variables among G7 countries. In Canada, Italy, and U.S.A., the relationship is bidirectional, and the asymmetric effect is at different quantiles. In France and Japan, the relationship is unidirectional, from the stock price index to the exchange rate, and the relationship is at different quantiles for the two countries. In Germany and U.K., the relationship is unidirectional in the opposite direction and is also at different quantiles. Lastly, it shows that international trading effects at different quantiles exist in Canada (at high quantile), Italy (at median quantile), and U.K. (at low quantile). On the other hand, portfolio balance effects at different quantiles exist in Germany (at low and median quantiles) and U.S.A. (at high quantile). The study shows neither effect in France and Japan. The empirical findings in this paper have important implications for academicians, international institutional investors, and policy-makers on the G7 markets.

Is the Impact of COVID-19 Significant in Determining Equity Market Integration? Insights from BRICS Economies

“…On the contrary, another strand of knowledge argues that the presence of extremely high or low exchange rate triggers a negative relationship between exchange rate and stock market in financial markets that are more integrated (Caporale et al, 2014; Cavusoglu et al, 2019; Cenedese et al, 2015; Kasman et al, 2011; Liang et al, 2013; Lou & Luo, 2018; Tsai, 2012). It may be due to market expectations toward international trade restrictions (Gokmenoglu et al, 2021) which affect the capital account transactions having a bearing on exchange rates.…”