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

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

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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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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