The relationship between Amman stock exchange index and the exchange rate using granger causality test

Abstract EN

This paper examines the relationship between the Exchange Rate and Amman Stock Exchange Index over the period (1989-2004).

To achieve this objective, Granger Causality Test has been applied using data gathered from monthly and annual analytical reports from the Central Bank of Jordan and Amman Stock Exchange reports.

Different diagnostic tests were also performed to reach the final results, such as Lag Length Selection and Unit Root Test.

Although the direction of causality seems to depend on specific characteristics of the country analyzed, most of previous empirical studies have found that Exchange Rates and Stock Prices have predictive ability for each other.

However, the empirical results of this study have indicated that there is no relationship between the Exchange Rate and Amman Stock Exchange Index.

The fact that the Jordanian Dinar is pegged to the US dollar might be one of the reasons of such results, in addition to the fact that the factors that affect the exchange rate might be different from the factors that affect the stock index.