On the linkages between stock prices and exchange rate : evidence from Egypt

Abstract EN

The study aimed to investigate the interdependence between stock and foreign exchange markets in Egypt.

The flow-oriented approach hypothesizes that causality runs from exchange rate to stock prices whereas the stock-oriented approach hypothesizes that it runs on the opposite direction.

We hypothesised that these financial variables are interrelated.

Multivariate Co integration and the vector error correction model were applied on to monthly equity prices and trade-weighted exchange rate (EX) for the period 2003-ianuary to 2015-December.

The existence of long-run equilibrium relationship between the two variables was detected.

Statistically significant and negative coefficient of error correction term (ECT) implies the existence of bi-directional long-run causality between stock prices and EX.

However, the speed of adjustment, measured by the magnitude of the coefficient of the ECT, was found low in both equations.

In the short-run, causality runs from equity prices to EX.

The global financial crash was found to have insignificant effect on both variables whereas political instability accompanying the January Revolution in 2011 was found to adversely affect the behaviour of both variables.