The effect of the financial crisis on the dynamic relation between foreign exchange and stock returns

Abstract

Purpose The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial crises on the relation between foreign exchange and stock returns in the MENA region. Design/methodology/approach The authors examine the long-run relation between these two variables using VECM and the authors study the volatility behavior of these two variables using the Dynamic VECH–generalized autoregressive conditional heteroskedasticity (GARCH) model. The sample covers the MENA region over the period 2004–2015. Findings The results indicate a regime shift in three countries: Egypt, Tunisia and Morocco. In addition, the results assert asymmetric relation between stock returns and changes in exchange rates during pre-crisis and post-crisis periods. Modeling the volatility of the foreign exchange and stock return and their covariance using VECH–GARCH suggests that the persistence in volatility is more prominent in the crisis/post-crisis period as compared with the pre-crisis period. Finally, the authors also find more significant results for the persistence parameter in the covariance between stock return and foreign exchange in the crisis/post-crisis period as compared with the pre-crisis period. Originality/value To the best of the authors’ knowledge, the studies by Wong and Li (2010) and Caporale et al. (2014) are the only two that have examined the interaction between stock prices and foreign exchange during the recent financial crisis of 2008. To the authors’ knowledge, none of the previous literature examined the impact of financial 2008 crisis on the relation between foreign exchange and stock prices in the MENA.

Gold-oil-exchange rate volatility, Bombay stock exchange and global financial contagion 2008: Application of NARDL model with dynamic multipliers for evidences beyond symmetry

“…The main purpose of dividing the time-series period into three different regimes is to scrutinize the asymmetrical impact of underlying regressors on stock prices for three multiple regimes. This classification of division is in line with (Ajaz et al, 2017;Andriansyah & Messinis, 2019;Hung, 2019;Neveen, 2018)…”

“…This research is also relevant for academicians to consider the period while finding out possible linkages between stock indexes, oil prices, gold prices, and exchange rate fluctuations. Another theoretical contribution is added to existing literature that there is the asymmetrical or nonlinear association between variables which are assumed to be linear by (Sahu et al, 2014;Shiva & Sethi, 2015;Tehreem, 2018;Keswani & Wadhwa, 2018;Neveen, 2018;Rajesh, 2019). Moreover, in existing literature few researchers have utilized arbitrage pricing theory to explain symmetrical connotations between macroeconomic fluctuations and stock indexes (Christofi et al, 1993;Günsel et al, 2009;Mollick & Nguyen, 2015;Saumya, 2012;Shahzad et al, 2017;Yan & Yang, 2016) while others have utilized EMH (Wickremasinghe, 2011;Hatemi-J, 2012;Singhania & Prakash, 2014;Othman et al, 2019).…”

“…We have identified the following four most important research gaps in the existing literature. Firstly, in existing literature number of research articles have only explored linear linkages between stock indexes, exchange rate fluctuations, oil price volatilities, and gold prices by utilizing linear models like VECM (Badry, 2019;Keswani & Wadhwa, 2018;Neveen, 2018;Rajesh, 2019;Sahu et al, 2014;Shiva & Sethi, 2015), VAR (Areli Bermudez Delgado et al, 2018;Ghulam, 2018;Huang et al, 2018), ARDL modeling approach (Ho, 2018;Singhal et al, 2019) and limited efforts have been made to explore the asymmetrical impact of Exchange rates-Gold-Oil price volatility on stock indexes by using NARDL model by (Shin et al, 2014).…”

“…Moreover, the authors have also analyzed the transmission of volatility between currency fluctuations and stock indexes of central and eastern European context and found bidirectional transmission of volatility between currency fluctuations and stock indexes for Croatia, Hungary, and the Czech Republic. Neveen (2018) studied the interrelation between exchange rate and stock indexes in the context of the Mena region through employing symmetrical models like VECM and VECH-GARCH model to determine the volatility characteristics of exchange rate fluctuations and stock indexes. Results showed a nonlinear association between currency value fluctuations and stock prices during the pre-economic crunch regime and after the economic crisis regime.…”

Performance Analysis of GARCH Family Models in Three Time-frames

“…Researchers also employed the GARCH family model to discover the effect of the COVID-19 crisis in agriculture commodity prices, such as Tanaka and Guo (2020) who explored the volatility of wheat price. On the other hand, the financial crisis (in 2008) of the MENA region was investigated by Ahmed (2018), and he found regime shift characteristics within three countries (Engle (2018) also took into account the similar crisis period in his study). Besides, he uncovered that volatility persistence during the crisis and post-crisis periods is more than that of the pre-crisis period.…”