Regime Shift Behavior and Interconnectedness of Stock Market Volatility and Exchange Rate Movements: Empirical Evidence from Emerging and Developed Economies

Attaullah, Kashif Hamid, Muhammad Yasir Saeed and Shareen Hussain

Sustainable Business and Society in Emerging Economies, 2022, vol. 4, issue 2, 383-392

Abstract: Purpose: The purpose of this study is to examine the regime shift behavior and interconnectedness between stock market volatility and exchange rate in a pre and post COVID context.Design/Methodology/Approach: For this purpose Pakistan India and China has been taken as emerging economies and USA UK and Japan as developed economies. &Daily data of exchange rates and stock market indices have been used from Jan,1 2011 to Apr 30, 2021. Markov regime switching model, GARCH model and Granger causality test has been used.Findings: The outcomes of this study empirically confirmed that the Markov regime switching model is flexible model because it captures regime shifts in the mean and variance equation of all sample economies. Moreover, the sum of GARCH (1,1) indicates that volatility shocks are persistent except India. Study also concluded that exchange rate volatility has significant positive impact on stock market of Pakistan, USA and Japan in a pre COVID context.Implications/Originality/Value: A post COVID context has significant impact on the stock market of India, U.S.A. and U.K. Granger causality results indicates unidirectional relationship for Pakistan, China and USA. Whereas for Japan bi-directional relationship is found but for India and UK no directional causality exist. &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&

Keywords: Stock Market volatility; Exchange rate; GARCH; Regime Shift Behavior (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:src:sbseec:v:4:y:2022:i:2:p:383-392

DOI: 10.26710/sbsee.v4i2.2329

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