NON-LINEAR DYNAMIC RELATIONSHIP BETWEEN EXCHANGE RATE AND STOCK PRICE OF PAKISTAN FROM 1965 TO 2015

Abstract

The aim of this study is to determine the dynamic association between stock prices and exchange rates of Pakistan from 1965 to 2015, including the war era. Long and short-run associations are explored between these two time series variables. Econometrics techniques such as Johansson co-integration test, Vector Autoregressive Model, Granger causality and Vector Error Correction Model are used to assess the association between stock price and exchange rate of Pakistan. Daily time series data of Pakistan from 1 Jan 1965 to 31 May 2015, from Thomson Reuter’s software is used. The Johansson co-integration approach reveals that there are two co-integration factors existing between the two series, which shows that these two-time series have long-run movement. Nevertheless, Granger causality test reveals that bi-direction causality exists among the variables. While, the Vector Error Correction Model reveals that there is a short-run association among the series.