International Journal of Business and Economics Volume 18, No. 2 September, 2019

Relationship between Exchange Rate and Equity Pricesin an Emerging Market: A Continuous Wavelet-based Analysis for Bangladesh

Aviral Kumar Tiwari

Rajagiri Business School, Rajagiri Valley Campus, Kochi, India and Montpellier Business School, Montpellier, France

Anisul M. Islam

College of Business, University of Houston (Downtown) Houston, Texas, U.S.A.

Md. Mohibul Islam

ULAB School of Business, University of Liberal Arts Bangladesh Dhaka, Bangladesh

Abstract

This research empirically examines the relationship between the exchange rate and stock prices by utilizing a relatively novel and non-traditional technique known as the continuous wavelet approach, which involves the continuous wavelet power spectrum, cross-wavelet transform, and cross-wavelet coherency. We employ monthly time-series data from the period 1986m09 to 2014m07 for a total of 334 monthly observations on Bangladesh. The empirical results strongly support the traditional hypothesis that the exchange rate leads (causes) stock prices compared to the alternative portfolio-based hypothesis. The implication of this finding is that policy makers need to be extra careful in managing the local exchange rate and to consider any possible effects of policy actions in the foreign exchange market on the stock market in order to avoid undesirable consequences.

Keywords：exchange rate, stock prices, wavelet coherency, Bangladesh.

JEL Classifications：C40, E32, F21, F31, G15.

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