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

Walid, C; Chaker, A; 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.

Citation

Walid, C., Chaker, A., Masood, O., & Fry, J. (2011). Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach. Emerging markets review, 12(3), 272-292. https://doi.org/10.1016/j.ememar.2011.04.003

• Journal Article Type: Article
• Acceptance Date: Apr 7, 2011
• Online Publication Date: Apr 19, 2011
• Publication Date: 2011-09
• Deposit Date: Feb 4, 2022
• Journal: Emerging markets review
• Print ISSN: 1566-0141
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 12
• Issue: 3
• Pages: 272-292
• DOI: https://doi.org/10.1016/j.ememar.2011.04.003
• Keywords: Markov regime switching; Stock market volatility; Exchange rate changes; Time varying transition probabilities
• Public URL: https://hull-repository.worktribe.com/output/3920972