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

Walid Chkili, Chaker Aloui (), Omar Masood and John Fry ()

Emerging Markets Review, 2011, vol. 12, issue 3, 272-292

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.

Keywords: Markov; regime; switching; Stock; market; volatility; Exchange; rate; changes; Time; varying; transition; probabilities (search for similar items in EconPapers)
Date: 2011
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