Reactions of stock returns to asymmetric changes in exchange rates and oil prices

Abstract

When an economy does well as a result of crude oil proceeds, it is expected that its financial market records a boost. So, when the economy regresses due to fluctuations in oil prices, its financial market also reacts in tandem. To shed light on the uninterrupted fluctuations, we empirically estimated the effect of changes in exchange rates and oil prices on stock returns in developing countries using the nonlinear autoregressive distributed lag (NARDL) methodology. Results reveal that a 1 percent negative shock to the exchange rate diminished returns significantly by 1.015 percent and 2.191 percent for Egypt and Nigeria respectively whereas, in Tunisia, Morocco, and Tanzania, stock returns increased significantly by 0.118 percent, 0.176 percent, and 1.145 percent respectively. For every 1 percent positive shock to exchange rates in Egypt, Nigeria, Tunisia, Morocco, and Tanzania, returns declined by 1.012 percent, 1.04 percent, 0.015 percent, 0.112 percent, and 0.214 percent respectively. A 1 percent positive shock in oil price negatively influences returns by 0.02 percent, 0.05 percent, 0.18% percent, 1.09 percent, and 0.25 percent in Egypt, Nigeria, Tunisia, Morocco, and Tanzania while a 1 percent negative shock stimulated stock returns by 1.02 percent, 0.128 percent, 0.199 percent, 1.029 percent and 0.091 percent in Egypt, Nigeria, Tunisia, Morocco, and Tanzania respectively. Different policy reaction functions should be executed differently for depreciation, appreciation, and oil price shock to enhance the favorable flow of returns in stock markets

The reaction of the Egyptian stock market to recurring devaluations: an event study approach

“…Dahir et al (2018) observed similar asymmetry across the BRICS countries, with positive impacts in Brazil and Russia, negative impacts in India, and a bidirectional relationship in South Africa. Gokmenoglu et al (2021) and Umoru et al (2023) also suggest that the response of stock returns to exchange rate fluctuations is not uniform in emerging economies and in oil-producing African countries, respectively. Amewu et al (2022) observed that the Covid-19 pandemic significantly altered the relationship between exchange rates and the equity index in Ghana.…”

“…Gokmenoglu et al. (2021) and Umoru et al. (2023) also suggest that the response of stock returns to exchange rate fluctuations is not uniform in emerging economies and in oil-producing African countries, respectively.…”

“…Some studies have found a positive impact of exchange rate fluctuations on stock prices (Akram et al, 2020;Elmoghany, 2021;Gurloveleen and Bhatia, 2016;Hung, 2022;Sokhanvar et al, 2024), while others suggest negative effects of devaluation on stock returns (Bahar et al, 2018;Glen, 2002;Patro et al, 2014). Additionally, the asymmetric effects of exchange rate fluctuations on stock returns have been examined (Dahir et al, 2018;Effiong and Bassey, 2019;Gokmenoglu et al, 2021;Umoru et al, 2023). Furthermore, studies have shown discrepancies across countries (Karolyi and Wu, 2022;Tudor and Popescu-Dutaa, 2012;Van-Hop, 2019) and a time-varying relationship (Dang et al, 2020;Hashmi et al, 2022;Megaravalli and Sampagnaro, 2018;Tian et al, 2023).…”