The
main purpose of this paper is to examine the relationship
between stock prices and exchange rates in Malaysia, for
the periods immediately before and during the 1997 Asian
crisis, and during the currency unpegged period. This research
considers high-frequency data of USD-MYR exchange rates
and Kuala Lumpur Composite Index (KLSE). The Toda-Yamamoto
causality test finds that there was no causality at all
during the non-crisis and crisis periods. Nevertheless,
the results also reveal that there was an unidirectional
causality running from stock prices to exchange rates for
the currency unpegged period.
This paper investigates the relationship between exchange rates and stock prices in Malaysia using daily data in three sub-samples. The pre-crisis period covers from December 3, 1993 to July 1, 1997, and the crisis period continues from July 2, 1997 through September 1, 1998 (Girard et al., 2003; Hatemi-J and Roca, 2005), and from July 22, 2005 to June 8, 2007, which is the period when Malaysia dropped its currency peg against the US dollar. The interaction between exchange rates and stock prices has several important implications. Firstly, the relationship between exchange rates and stock prices has a crucial role in affecting the development of emerging markets, particularly in those countries which have expanding corporate sectors with listed firms and growing tradable sectors which are sensitive to exchange rate policies (Abdalla and Murinde, 1997). Secondly, the interaction between exchange rates and stock prices is often used to predict future trends in each other by fundamental investors (Nieh and Lee, 2001). Thirdly, economic and financial policymakers and regulators would need to know the relationship between asset prices, such as those between exchange rates and stock markets, if they are to formulate the appropriate policies (Hatemi-J and Roca, 2005). |
