Journal of Accounting, Finance & Management Strategy
















Volume 14, Number 1, June 2019

A Study on the Correlations of Stock Market, Exchange Rate and Interest Rate in Taiwan

Wei-Ju Huang¹*, Wen-Shiung Lee²


The development and liberalization of the international economic and trade market in recent years have accelerated the growth and integration of the international financial market. In this regard, overall economic and financial market indicators become top priority of scholars. Hence, the study intends to explore the correlations of stock market, exchange rate and interest rate in Taiwan.

This study mainly analyzes the correlation of variables based on the monthly data of Taiwan market from 1990 to 2018. Through Unit Root Test, Cointegration Test, and Granger Causality Test of Vector Autoregression (VAR), Impulse Response Function and Forecast Error Variance Decomposition, this study analyzes the causal relationship, impulse response and forecast error variance among variables, and identifies leading indicators, response time of variables and impact of other variables.

Based on the empirical results of this paper, it can be seen that (1) According to the Granger Causality Test, the exchange rate is the leading indicator among variables in the short term, while the stock market is the leading indicator in the long run. (2) According to the Impulse Response Function, the response of exchange rate and interest rate to stock market is current and immediate, but the response of stock market to exchange rate and interest rate is delayed. (3) According to the Forecast Error Variance Decomposition, the exchange rate is most significantly affected by the stock market, followed by the impact on the stock market by the exchange rate, and the impact on the interest rate by the stock market.

Finally, this study puts forward relevant suggestions based on the empirical results, so as to serve as references for further researchers to conduct more complete and objective researches. In addition, this paper, based on the empirical results, hopes to provide academic circles, practical circles and policy makers with reference to Taiwan's overall economic and financial market, and to understand development process of various indicators, so as to achieve market prediction, reduce risks of investment in the financial market, and achieve better investment performance.


Keywords: Stock Market, Exchange Rate, Interest Rate, Unit Root Test, Cointegration Test, Vector Autoregression, Granger Causality Test, Impulse Response Function, Forecast Error Variance Decomposition.

JEL Classification: E44, M21


¹ Department of Business Administration, Tamkang University * E-mail: hu5503355@gmail.com

² Department of Business Administration, National Chengchi University.