Journal
EMERGING MARKETS REVIEW
Volume 12, Issue 3, Pages 272-292Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ememar.2011.04.003
Keywords
Markov regime switching; Stock market volatility; Exchange rate changes; Time varying transition probabilities
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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. (C) 2011 Elsevier B.V. All rights reserved.
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