A bivariate causality test between exchange rates and equity markets in BRIC countries

Abstract

In this paper, the causal relation between stock prices and exchange rates is examined through applying Toda and Yamamoto causality test using weekly data from Brazil, Russia, India and China (BRIC countries). The sample period started from 5th May, 2003 to 6th September, 2010. The whole sample period was divided into three sub-periods: Pre-crisis, during crisis and Post-crisis. The series were not found stationary while applied Kwiatkowski, Phillips, Schmidt and Shin (KPSS) Tests. In the pre-crisis period, Brazil showed bidirectional and Russia and India showed uni-directional relation moving from stock market to exchange market. During crisis period, Russia evidenced the bidirectional causality while Brazil and India showed unidirectional relation running from stock prices to exchange rates. In post crisis period, Brazil and Russia revealed the stability in the relationship during crisis and post-crisis but causality was running from exchange rates to stock prices in pre-crisis period in the case of India. Hence, China is not provided any evidence of relationship between exchange rates and stock prices during all three sub-periods. Overall results of study proved unilateral and bilateral relationship between the variables whereas during the entire period of the study, no interaction between variables was highlighted in China.