The paper attempts to empirically determine the causal relationship between the stock price and the exchange rate in the Philippines. Having established the stationarity condition of each series using Augmented Dickey-Fuller (ADF), Phillip-Perron (PP) and mean stationary (KPSS) unit root tests, the causal linkage between the stock price and the exchange rate was examined using the Granger non-causality test as prescribed by Toda and Yamamoto (1995). Results suggest existence of bi-directional causality between exchange rate and stock price in the Philippines over the period 1991 to 2001. The eruption of the recent Asian currency crisis, apparently does not affect the causal structure between these two leading prices in the Philippines.
In
the late 1996, it was apparent that the Thailand's economy
had lost its momentum. The economic activity was slowing
down and the export sector recorded a negative growth. As
import kept growing, the current account deficit was widening.
At the end of 1996, an 8.1% current account deficit (as
a percentage of Gross Domestic Product) was recorded. Following
this unhealthy scenario, the Thai baht was intensely attacked
in the first half of 1997. After spending US$23.4 bn to
defend the national currency, the Bank of Thailand (BOT)
announced on July 2, 1997 that it would allow a "managed
float" of the Thai baht against other currencies. Immediately
in the second half of 1997, baht lost half of its value
against major currencies and reached the historic low of
baht 56 to a US dollar on January 12, 1998. Following the
collapse of the Thai baht's peg, other financial markets
in the region, in particular Malaysia, Indonesia, Korea
and the Philippines faced a similar downward path in the
second half of 1997 and first half of 1998. These markets
faced increasing pressure as the aftermath of the devaluation
of the baht, and this pressure was reflected in the unravelling
of the managed currencies in Malaysia and Indonesia. As
the crises became full blown, intense foreign exchange and
stock market turmoil spread in the region, culminating in
the collapse of the Korean won.
Among
the affected nations, it was apparent that the Philippines
was the first country confronted by massive movements in
financial asset prices (Nagayasu, 2001). Due to the enormous
pressure on the pesos, the monetary authority had decided
on July 11, 1997 to abandon the pesos' peg and allow it
to float freely. Immediately after that, pesos which was
traded around, pesos 26 per US dollar has lost half of its
value in the second half of 1997 and reached a low of, pesos
44.92 per US dollar on January 8, 1998. The immediate impact
of the peso depreciation was on the stock market, with the
Philippine Composite Index (PCI) declining by 33% in the
second half of 1997. As the contagion spread in the region,
investors' confidence was further eroded. The reversal of
the short-term capital flows caused the PCI to decline further
by as much as 18.7% through January 9, 1998 and reached
1082.18 points on September 11, 1998 which represented a
68% decline from its pre-crisis peak. This vicious cycle
culminated in the recession of 1998. |
