A note on the interaction between stock prices and exchange rates in Middle-East economies

Ample studies have been conducted to analyse the interaction between stock prices and exchange rates in developed and developing countries. However, studies on Middle-East economies are limited. Moreover, many existing studies test for Granger causality in a bi-variate setting which in turn leads to conflicting causality results. The goal of this study is to investigate the causal interaction between stock prices and exchange rates empirically in Iran, Kuwait, Oman and Saudi Arabia from January 2004 to December 2011. Among four Middle-East economies, we find that stock prices and exchange rates have bi-directional causality in Iran, Oman and Saudi Arabia, but the variables do not interact in Kuwait. Additionally, the recursive causality tests reveal that these relationships are stable over the analysis period. Therefore, stock prices and exchange rates affect each other at least in Iran, Oman and Saudi Arabia