The Relationship Between Stock Prices And Exchange Rates : Evidence From Ten Middle Eastern Countries
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Date
2012-02
Authors
Parsva, Parham
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Abstract
This study investigates the relationship between stock prices and exchange rates in
ten Middle Eastern countries, namely, Bahrain, Egypt, Iran, Jordan, Kuwait, Lebanon,
Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) before and during the
2007 global financial crisis. For this purpose, two frameworks are determined; the first
framework is a bivariate model involving only stock prices and exchange rates, while
the second framework is a multivariate model including the two relevant variables,
inflation rates, and oil prices. Daily data are used for the bivariate model, while monthly
data are used for the multivariate model. The sample period is from January 1, 2004 to
September 30, 2010. The sample is divided into two subperiods, that is, the period from
January 1, 2004 to September 30, 2007 and the period from October 1, 2007 to
September 30, 2010, to represent the precrisis period and the crisis period respectively.
The econometric techniques employed are unit root tests, Johanson-Juselius
cointegration test and Granger causality test. Moreover, to ensure the goodness of fit of
the models, some diagnostic and specification tests, that is, serial correlation LM test,
Autoregressive Conditional Heteroscedasticity test, and Ramsey’s RESET test, are
employed.
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Keywords
Foreign exchange rates