[经济学]伯明翰大学投资学专业毕业论文：外汇市场与股票市场.doc

Dynamic Relationship between Foreign Exchange Market and Stock Market.THE DYNAMIC RELATIONSHIP BETWEEN STOCK MARKET AND FOREIGN EXCHANGE MARKET: EVIDENCE ON UK, JAPAN, CHINA AND INDIAAuthor: Feng WeidaSupervisor: Dr. Abimbola AdedejiMSc. Investments (2010-2011)Student Registration Number: 1122995Dissertation Submitted in Partial Fulfilment of degree of MSC Investments (2010-2011)Word count: 11195ABSTRACTThe research on the relationship between stock market and foreign exchange market has never stopped, however, the verdicts was still not consistent in both theory and empirics due to the difference model and sample be employed. In this dissertation, we apply the analysis to the daily data of two developed countries (UK and Japan) and two developing countries (China and India) from 80s to 2011 to explore the dynamic linkage between stock market and foreign exchange market. Moreover, the effect to the relationship from country type and financial crisis happened in 2008 will be concerned. The empirical study results indicate that there is no clearly long-run equilibrium relationship between stock market and foreign exchange market in all the sample countries, except Japan. Furthermore, the financial crisis happened in 2008 only influenced the causality relationship between stock market and foreign exchange market in the developing countries. Finally, there is no evidence to prove that the developed countries and developing countries represent different characteristic on the long-run relationship between stock market and foreign exchange market.Key words: stock price, stock markets, foreign exchange rate, foreign exchange markets, financial crisis, cointegration, Granger causality.ACKNOWLEDGEMENTSThere are several people that I would like to thank because I would never have finished the dissertation without their support.I would like to express my gratefulness to my supervisor, Dr Abimbola Adedeji, for his earnest and patient guidance. I am heartily thankful to my friends Lucy, Fan and Han Peng, who worked together with me during the summer. Finally, I also would like to offer my deepest gratitude to my family. They are the source of my confidence to complete the work due to they are always encouraging me.I would like to dedicate this dissertation to my all family.CONTENTSABSTRACT.II ACKNOWLEDGEMENTS.III TABLES.VI 1. Introduction.12. Literature Review.32.1. Theories to explain the relationship between stock market and foreign exchange market.32.1.1. Flow-oriented model and Stock-oriented model.32.1.2. Traditional approach and Portfolio approach.42.1.3. Other theories.52.2. Discrepancy in empirical research on the relationship between the two markets.62.3. Previous research about cointegration relationship.92.3.1. Studies for the developed countries.92.3.2. Studies for the developing countries.112.4. Previous research about causality relationship.132.4.1. Studies for the developed countries.142.4.2. Studies for the developing countries.152.4.3. The studies for comparing developed countries and developing countries.162.5. Hypothesis .173. Data and Methodology.193.1. Data.193.2. Methodology.213.2.1. Unit root test.213.2.2. Cointegration.223.2.3. Granger causality test.244. Empirical Result.264.1. Result of unit root test.264.1.1. Unit test result of full data.264.1.2. Unit root test result of sub-periods.274.2. Result of Cointegration test.284.2.1. Full data cointegration test result.294.2.2. Sub-periods data cointegration test result.314.3. Result of causality test.334.3.1. Full-data causality test result.334.3.2. Sub-periods causality test result.345. Summary Conclusion and Recommendations.375.1. Conclusion.375.2. Recommendation.39References List.41Appendix 1.45Appendix 2.46Appendix 3.47TABLESTable 1. Full data unit root test result.26Table 2. Sub-periods Unit root test of stock price.27Table 3. Sub-periods Unit root test of exchange rate.28Table 4. Full data Static OLS Regression Result.29Table 5. Full data Augmented Dickey-Fuller test Statistics for residuals from cointegrating regression.30Table 6. Sub-periods data Static Regression Result.31Table 7. Sub-periods data Augmented Dickey-Fuller test Statistics for residuals from cointegrating regressions.31Table 8. Full data Granger Causality test result.34Table 9. Sub-periods data Granger Causality test result.35Table 10. The detail of Full data Granger Causality test result.47Table 11. The detail of Sub-time data Granger Causality test result.47Dissertation of MSc Investments Program. By: Feng Weida, 1122995 VI Dynamic Relationship between Foreign Exchange Market and Stock Market.1. IntroductionIn the recent years, the dynamic relationship between exchange rate and stock market price was interested by academics and practitioners. Particularly, with the sharply growth of some emerging capital market and their degree of market openness, the more flexible foreign exchange rate policy and more relaxed foreign capital control was accepted by these countries. Empirically, during the 1980s, the opening of emerging market provided more opportunities of international investment and portfolio diversification to the international investors. Meanwhile, as the more flexible foreign exchange rate policy was employed, the exchange market fluctuated significantly in this period (Kate Phylakis and Fabiola Ravazzolo, 2005). Moreover, the regulators and investors face the problems that whether the market regulations or investment strategies which used in developed financial markets are applicable to the emerging markets, especially the global financial markets, just suffered from the financial crisis in 2008.Most of the past researches focus on the developed markets but less for the emerging markets and the differences. They have approved the dynamic relationship between stock market and foreign exchange markets. However, there was no agreement about the direction of the causality relationship and explanation for the relationship, because they employed different samples and sample periods. Therefore, in this dissertation, we employ the samples include both emerging markets and developed markets, and makes the sample periods as long as possible. It aims to check whether the dynamic relationship always exists between stock market and foreign exchange market, and the causality direction of the relationship according to the empirical research. There are three main issues contributed in the dissertation. The first issue is which we claimed as a high light above, that the linkages between stock market and foreign exchange market. Secondly, we will explore the differences of relationship between stock market and exchange market in developed financial markets and emerging financial markets. And then, we will focus on exploring how the financial crisis influenced the relationship between the two important financial markets.This dissertation will be organised as below: the first part is introduction, includes the issue, objectives of the dissertation and the structure of the dissertation; secondly, literature review, the theories to explain the relationship between stock market and FX market will be provided and the results of previous research for both developed markets and emerging markets will be discussed in this section; Section three is used for introducing the data and three methodologies which we employed in the dissertation; Then, the empirical results will be discussed in part four; And the last part is summary and conclusions.2. Literature Review2.1. Theories to explain the relationship between stock market and foreign exchange market2.1.1. Flow-oriented model and Stock-oriented modelThere are principally two important theories for explaining the linkage between stock price and foreign exchange rates. They are flow-oriented model and stock-oriented model.Flow-oriented model was claimed by Dornbusch and Fischer in 1980. It referred that the real income and output can be affected by the fluctuation on foreign exchange rates through impacting on the international competitiveness and trading equilibrium. The changes of international trading environment will influence the future performance of a company which is usually employed to evaluate a companys share price. Therefore, the movement in foreign exchange may affect the stock price. They also considered that, to an export company, the increase of exchange rate makes the export goods cheaper, and increase the demand of goods. Consequently, the stock price rises as the value of company increase. But the effect is inversed for an import company that is the increase of exchange rate will provide a pressure to the stock price of the import company.Branson (1983) claimed another model named stock-oriented model to explain the relationship between the two markets. It represented that the foreign exchange rate depends on the demand and supply of the markets. So, once the stock market of a country performs well, the foreign assets will be attracted and flow into this market. Thereby, the exchange rate of this country will be raised since the demand of the countrys currency is increased due to the increased demand of investment in stock market.2.1.2. Traditional approach and Portfolio approachBesides the two models above, some researchers tried to explain the relationship at the levels of microeconomics and macroeconomics. Granger and Huang (2000) considered that, at the micro level, the portfolio value of domestic and multinational companies will be influenced by the changes of foreign exchange rate. That is the profits of company fall as the value of domestic currency increase, and it makes the stock price fall. And at the macro level, under the floating exchange rate regime, the domestic currency value increases will weak the competitiveness of domestic companies, thus, reduce the stock price. We call it traditional approach.However, with the globalization of capital markets, the movements of foreign exchange rates and stock prices represent more on the capital flow but not only the non-equilibrium of trading as before. That is why the portfolio approach was published. It argued that the domestic investors wealth reduce due to the fall of stock price. It decreased the money demand and reduced the domestic interest rate. Consequently, the reduced interest rate makes more investors choose international investments instead of domestic investments. Therefore, the increased demand of foreign currency leads the domestic currency value reduce. It was clear that, the traditional approach and portfolio approach provided totally contrary explanation on the problem of the relationship between foreign exchange rate and stock price. Under the traditional approach, the relationship between the two markets is positive, but under the portfolio approach, the relationship is negative. The main difference of the two approaches is that, under the traditional approach, the exchange rate moves earlier than stock price; whereas, under the portfolio approach, stock price moves earlier than exchange rate. 2.1.3. Other theoriesWu (2000) tried to explain the linkage between stock price and foreign exchange rate through the effect from interest rate and inflation. Firstly, the real interest rate affects both stock price and foreign exchange rate. On one hand, if the real interest rate raises, it promotes the capital flow in the market, thus the exchange rate fall; On the other hand, due to the higher interest rate decreases the present value of future cash flow of the company, the stock price also will be reduced. Secondly, the inflation also built the relationship between stock market and foreign exchange rate. On one hand, in the inflation period, the domestic currency will depreciate no matter it was valued by goods, service or foreign currencies. That is the exchange rate will increase. On the other hand, the higher inflation makes the investors require higher risk premium and return rate, which may leads the stock price decrease. So, Wu concluded that, interest rate built a positive relationship between stock price and foreign exchange rate, but once the inflation influenced market, the relationship might change to negative.2.2. Discrepancy in empirical research on the relationship between the two markets.Theoretically, most researchers believe that the relationship between stock price and foreign exchange rate exist, but the discrepancies focus on the causal direction between the two financial price variables. For example, the flow-oriented argues that stock price will positively move with foreign exchange rate, that is foreign exchange rate increase makes stock price performance well, and the foreign exchange rate fall leads stock price reduce. However, the stock-oriented suggests that the good performance of stock market may have a negative effect to foreign exchange rate market. The interesting is all the theories were supported by lots of empirical researches.Aggarw-al (1981) found that the US stock price had a positive relationship with the trade-weighted exchange rate. The result matched with flow-oriented theory. But, Soenen and Henni-gar (1988) claimed that the relationship between US stock index and weighted exchange rate of 15 countries is negative. His result can be explained by stock-oriented theory. Besides that, Ma and Kao (1990) pointed another suggestion that the relationship between the two financial prices depends on the trading types of country: for an export-oriented country, a negative relationship exists between stock price and exchange rate; but for an import-oriented country, the relationship should be positive. Moreover, Wu (2000) pointed that Singapore dollar revalued to US dollar and Malaysia dollar, and depreciated to Japanese Yen and Indonesia Rupiah in the nineties. It had a significant long-term effect to the stock markets. Particularly, the relationship between the exchange rate of Singapore dollar to US dollar and Singapore stock market index was negative during the financial crisis, but positive during the recover period. Therefore he considered that during the period of economy recovering, the most important factors influenced the stock price is the competitiveness of real productions but not the confidence of the market participators. Granger and Huang (2000) thought the financial liberalization makes the international capital flow more frequency and faster, so it can not only use the monthly data to analysis the relationship between stock price and foreign exchange rate as the effect of capital flow can not be represented by monthly data adequately. As a result, they employed the daily data and analysed through impulse response function. They found that the Japan and Thai markets support traditional approach, and Singapore market support portfolio approach. However, when the traditional approach and portfolio approach effected the market at the same time, the relationship between the two financial price variables is positive or negative depends on which approach is stronger than the other one. Pan et al. (2007) found that some relationship exists between stock price and foreign exchange rate, but he can not explain the relationship by any theory. On one hand, according to flow-oriented, for the countries with higher degree of international trade (i.e. the amount of import and export divide by GDP), it should exist a closer causality relationship between stock price and exchange rate, however, his result do not support the theory. For example, the international trade degree of Hong Kong was quite high, but there was no any significant evidence to prove that the movement on exchange rate influenced the stock price. In contrast, Japan, who with the smallest rate of international trade amount to GDP in the samples, shown a clear causality relationship as above. On the other hand, the relationship also can not be explained by capital flow theory. The theory argues that the revaluation (or depreciation) of domestic currency makes the flow in (or flow out of) capital, thereby, effect the stock price. That means if the foreign exchange rate is stable, there must be no significant relationship between stock price and foreign exchange rate. However, the empirical research does not consistent with capital flow theory. For instance, the exchange rate of Malaysia and Thailand were very stable before financial crisis, but the stock price shown a strong tendency to follow the movement of foreign exchange rate. Further more, the lagging stock market retu