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Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach

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  • Walid, Chkili
  • Chaker, Aloui
  • Masood, Omar
  • Fry, John

Abstract

In this paper we employ a Markov-Switching EGARCH model to investigate the dynamic linkage between stock price volatility and exchange rate changes for four emerging countries over the period 1994-2009. Results distinguish between two different regimes in both the conditional mean and the conditional variance of stock returns. The first corresponds to a high mean-low variance regime and the second regime is characterized by a low mean and a high variance. Moreover, we provide strong evidence that the relationship between stock and foreign exchange markets is regime dependent and stock-price volatility responds asymmetrically to events in the foreign exchange market. Our results demonstrate that foreign exchange rate changes have a significant impact on the probability of transition across regimes.

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Bibliographic Info

Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 12 (2011)
Issue (Month): 3 (September)
Pages: 272-292

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Handle: RePEc:eee:ememar:v:12:y:2011:i:3:p:272-292

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Web page: http://www.elsevier.com/locate/inca/620356

Related research

Keywords: Markov regime switching Stock market volatility Exchange rate changes Time varying transition probabilities;

References

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Citations

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Cited by:
  1. Walid Chkili & Duc Khuong Nguyen, 2014. "Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries," Working Papers 2014-388, Department of Research, Ipag Business School.
  2. Andreou, Elena & Matsi, Maria & Savvides, Andreas, 2013. "Stock and foreign exchange market linkages in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 248-268.
  3. Kearney, Colm, 2012. "Emerging markets research: Trends, issues and future directions," Emerging Markets Review, Elsevier, vol. 13(2), pages 159-183.
  4. Zhiqiang HU & Yizhu WANG, 2013. "The IPO Cycles in China's A-share IPO Market: Detection Based on a Three Regimes Markov Switching Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 115-131, October.
  5. Walid Chkili, 2012. "Is currency risk priced for emerging stock markets?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2267-2280.
  6. Liu, Li & Wan, Jieqiu, 2012. "The relationships between Shanghai stock market and CNY/USD exchange rate: New evidence based on cross-correlation analysis, structural cointegration and nonlinear causality test," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(23), pages 6051-6059.
  7. Kabir, Sarkar Humayun & Masih, Mansur, 2014. "Dynamic Integration of Domestic Equity Price, Foreign Equity Price and Macroeconomic Indicators: Evidence from Malaysia," MPRA Paper 57007, University Library of Munich, Germany.
  8. Suleyman Hilmi Kal & Ferhat Arslaner & Nuran Arslaner, 2014. "Bond Markets, Stock Markets and Exchange Rates: A Dynamic Relationship," Working Paper 18, Research and Business Development Department, Borsa Istanbul.
  9. Moez Khalfallah & Bruno-Laurent Moschetto & Frédéric Teulon, 2014. "Evaluation of the profitability of companies financed by venture capital (CVC) listed on the French market," Working Papers 2014-085, Department of Research, Ipag Business School.
  10. Rania Jammazi & Duc Khuong Nguyen, 2014. "Responses of international stock markets to oil price surges: a regimeswitching perspective," Working Papers 2014-080, Department of Research, Ipag Business School.
  11. Fry, John, 2013. "Bubbles, shocks and elementary technical trading strategies," MPRA Paper 47052, University Library of Munich, Germany.

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