Asia-Pacific Financial Markets

, Volume 25, Issue 2, pp 137–157 | Cite as

Dynamic Causality Between Stock Return and Exchange Rate: Is Stock-Oriented Hypothesis More Relevant in Malaysia?

  • Wee-Yeap LauEmail author
  • You-How Go


In the aftermath of Lehman shock, the effect of quantitative easing policy swiftly permeated the emerging stock markets, causing substantial fluctuation in currency value of different countries. This study aims to determine whether short-term capital flow is more relevant than trade balance in affecting the exchange rate or vice versa by examining the dynamic relationship between stock return and change of Malaysian Ringgit to US Dollar (MYRUSD) as well as between stock return and change of Malaysian Ringgit to Chinese Yuan (MYRCNY). Based on daily data of July 2005–July 2015, our results show: First, in the pre-crisis period, stock returns are found to Granger cause MYRCNY and MYRUSD in mean and variance. Second, during the crisis, the causality from stock returns to MYRCNY and MYRUSD is only found in the mean. Third, in the post-crisis period, there is causality-in-mean from stock returns to MYRUSD, in addition to volatility spillover from stock returns to both MYRCNY and MYRUSD. Hence, it can be concluded that the stock-oriented hypothesis is more tenable in Malaysia, suggesting that MYRUSD is determined by the short-term capital flow. Furthermore, the forex market is informational inefficient during the post-crisis period when the stock return has predictive power over the exchange rate.


Stock market Exchange rate Stock-oriented hypothesis Global financial crisis Causality-in-mean Causality-in-variance Volatility spillover Malaysia 

JEL Classification

F21 F31 G01 



We are grateful to comments from the anonymous reviewers on our work and participants at the 4th Malaysia Statistics Conference (Mystats 2016), Sasana Kijang, Central Bank of Malaysia.


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Copyright information

© Springer Japan KK, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Faculty of Economics and AdministrationUniversity of MalayaKuala LumpurMalaysia
  2. 2.Faculty of Business and FinanceUniversiti Tunku Abdul Rahman (UTAR)KamparMalaysia

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