Impact of Foreign Exchange Reserve on Stock Market Development: Evidence from Dhaka Stock Exchange

Abstract

This paper investigates the linkage between foreign exchange reserve
and stock market development in Bangladesh for a period of 1995 to 2014. This
study uses linear regression model, unit root test using ADF test, Johansen cointegration
test, granger causality test to measure the relationship between
foreign exchange reserves of Bangladesh and stock market capitalization. This
study employs multivariate framework incorporating inflation and interest rates.
The results show that there exists a unidirectional causal relationship between
market capitalization and foreign exchange reserve, inflation and market
capitalization but no relationship between interest rate and market
capitalization.