Relationship between stock market and foreign exchange market in the Philippines: 2006-2013

• Main Authors: Bautista, Diana Margarita A., Enriquez, Berkeley Novak T., Molina, Juan Paulo S., Uy, Imee Lanie H.
• Format: text
• Language: English
• Published: Animo Repository 2014
• Subjects: Stock exchanges > Philippines; Stocks > Philippines; Foreign exchange > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/9006
• Institution: De La Salle University

As the Philippines continuously work to build a stable and developed financial market, an important factor to consider is the relationship of the existing and active financial markets in the country which are the stock market and the foreign exchange market. Their interaction has been studied in the past by other countries and this is not a surprise considering that while both markets are seen to be indicators of macroeconomic growth in a country, these markets are also the most sensitive segments of a financial system. While examining the relationship of both financial markets, the data used for the study included the daily data of the exchange rate of the Philippine peso pegged to the US dollar and the PSEi closing price. To accurately measure this relationship, the study make used of the Granger's causality on a VAR framework and the correlation test to further comprehend the nexus between the two markets. In addition to this, an impulse response function was also conducted to trace the dynamic interaction among the variables. The study resulted to a bilateral relationship between the foreign exchange market and the stock market in the Philippines during the years 2006-2013. Also, with the employment of the correlation test, it was determined that the two financial markets are negatively correlated throughout the search. Findings of the study are particulalry helpful for the hedging and diversification of a corporation's portfolio as volatility of the foreign exchange rate influences a firm's value. Government officials and policy makers of a country (especially it central bank) will also be aided in their decision-making on both monetray and fiscal policies.