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Paper Title: Dynamic Link between Stock Prices and Exchange Rates of selected SAARC countries: A Co-integration Analysis
Abstract:
 
The study examines the link between stock prices and exchange rates of three selected SAARC countries including Pakistan, India and Sri Lanka, using monthly data from period of January 1999 to December 2015. This study employs statistical techniques like (ADF) Augmented Dickey Fuller and (PP) Phillips Perron, unit root tests, Johansen’s Co-integration test to determine long run equilibrium associations between stock price indices and exchange rates. The study finds no co-integration between the two variables; hence no long run association exists between them. Therefore, the investors in these markets have more opportunity to diversify their portfolios. However, using Granger Causality and impulse response tests, it finds significant short-run feedback effects, as stock prices Granger cause exchange rates in case of Pakistan and unidirectional causality flows from exchange rates to stock prices in case of Sri Lanka but no proof of causality running in either direction in case of India. Hence the findings for Pakistan and Sri Lanka have crucial policy implications.

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Dr Asfia Obaid
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