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DCCs among Sector Indexes and Dynamic Causality between Foreign Exchange and Equity Sector Volatility: Evidence from Egypt

Amira Akl Ahmed and Rania Ihab Naguib

Applied Economics and Finance, 2018, vol. 5, issue 1, 14-28

Abstract: The objective of the current paper is to explore the co-movements between domestic equity sectors in the Egyptian Exchange (EGX), using the dynamic conditional correlation (DCC) model, and to examine the time-varying causal links between the exchange rate volatility (EXVOL) and sector volatility (SVOL) using the bootstrap Granger non-causality tests in a bivariate VAR, where conditional volatility series are extracted from GARCH(1,1) model. We employ weekly data. Results show that all estimated DCCs are positive with a clear heterogeneity between the sector pairs. They do not exhibit stable correlation pattern for a prolong time, implying that DCC estimates change in response to price increment shocks to each sector in the pair. Hence, the assumption of static inter-sectoral correlations between domestic sector indexes is invalid when forming and periodically re-balancing portfolios. The global financial crash and the political instability in early 2011 have significantly increased the level of DCCs for four and ten out of fifteen pairs, respectively. Thus, the recent political turmoil in Egypt has widely affect diversification opportunities in the EGX whereas the global financial crash has not. The volatility transmission between SVOL and EXVOL is subject to structural breaks. The bootstrap rolling window estimations show that the casual relationship between SVOL and EXVOL varies across time. These findings would be of great importance to market participants in their hedging and investment decisions since investors and firms are more concerned with industrial sector exposure estimates.

Keywords: exchange rate; sector indexes; dynamic conditional correlation; bootstrap; time-varying causality (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)
Date: 2018
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