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Abstract
Purpose ― This article explores the causal link between stock and currency returns in The Middle Eastern and North African (MENA) countries from January 2011 through February 2020.
Methods ― This study uses the Vector autoregressive (VAR) and the Markov switching vector autoregressive (MS-VAR) models to investigate the dynamic causality between equity and exchange rate markets.
Findings ― Results indicate that this relation depends on the state of the markets. Furthermore, generally, equity returns have a significant impact on the currency markets, whatever the market state.
Implication ― Regime shifts in the relationship between stock and exchange rate markets are significant for portfolio allocation because they help investors improve their investment decisions through knowledge of the dynamic link between these markets.
Originality ― This study adds to the literature on the relationship between exchange rates and stock prices in the MENA countries, which have become attractive destinations for international investors due to their higher returns.
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Copyright (c) 2022 Marwa Trabelsi, Slah Bahloul
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References
- Aggarwal, R. (1981). Exchange rates and stock prices: A study of the US capital markets under floating exchange rates. Akron Business and Economic Review, 12, 7–12.
- Ahmed, N. (2018). The effect of the financial crisis on the dynamic relation between foreign exchange and stock returns. Journal of Economic Studies, 45(5), 994–1031. https://doi.org/10.1108/JES-10-2017-0308
- Ahmed, N. H. S. (2019). Exchange rate volatility and tourism stock prices: Evidence from Egypt. Journal of Association of Arab Universities for Tourism and Hospitality, 17(2), 55–68. https://doi.org/10.21608/JAAUTH.2019.91944
- Al-Muharrami, S. (2015). Arab banks during tranquil and turbulent times: A reflection of Arab economies. Mediterranean Journal of Social Sciences, 6(4), 200. https://doi.org/10.5901/mjss.2015.v6n4p200
- Al-Qaralleh, O. (2020). Social movements and corporate social disclosure: Evidence from Jordan. University of Essex.
- Andriansyah, A., & Messinis, G. (2019). Stock prices, exchange rates and portfolio equity flows: A Toda-Yamamoto panel causality test. Journal of Economic Studies, 46(2), 399–321.
- Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 18, 136–141. https://doi.org/10.1016/j.frl.2016.04.011
- Bal, D. P., & Rath, B. N. (2015). Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India. Energy Economics, 51, 149–156. https://doi.org/10.1016/j.eneco.2015.06.013
- Bildirici, M. E., & Turkmen, C. (2015). Nonlinear causality between oil and precious metals. Resources Policy, 46, 202–211. https://doi.org/10.1016/j.resourpol.2015.09.002
- Blau, B. M. (2018). Exchange rate volatility and the stability of stock prices. International Review of Economics & Finance, 58, 299–311. https://doi.org/10.1016/j.iref.2018.04.002
- Branson, W. H. (1981). Macroeconomic determinants of real exchange rates (NBER Working Paper No. 0801). https://doi.org/10.3386/w0801
- Chau, F., Deesomsak, R., & Wang, J. (2014). Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries. Journal of International Financial Markets, Institutions and Money, 28, 1–19. https://doi.org/10.1016/j.intfin.2013.10.008
- Chkili, W., & Nguyen, D. K. (2014). Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries. Research in International Business and Finance, 31, 46–56. https://doi.org/10.1016/j.ribaf.2013.11.007
- Dahir, A. M., Mahat, F., Ab Razak, N. H., & Bany-Ariffin, A. N. (2018). Revisiting the dynamic relationship between exchange rates and stock prices in BRICS countries: A wavelet analysis. Borsa Istanbul Review, 18(2), 101–113. https://doi.org/10.1016/j.bir.2017.10.001
- Dornbusch, R., & Fischer, S. (1980). Exchange rates and the current account. American Economic Review, 70(5), 960–971.
- El-Masry, A., & Badr, O. (2020). Stock market performance and foreign exchange market in Egypt: Does 25th January revolution matter? International Journal of Emerging Markets, 16(6), 1048–1076. https://doi.org/10.1108/IJOEM-11-2017-0477
- Franck, P., & Young, A. (1972). Stock price reaction of multinational firms to exchange realignments. Financial Management, 1(3), 66–73. https://doi.org/10.2307/3665374
- Frankel, J. (1983). Monetary and portfolio-balance models of exchange rate determination. In Economic interdependence and flexible exchange rates. MIT Press. Retrieved from http://www.hks.harvard.edu/fs/jfrankel/Monetary%5C&PB%5C Models%5C ExRateDetermtn.pdf
- Garcia, R. (1998). Asymptotic null distribution of the likelihood ratio test in Markov switching models. International Economic Review, 39(3), 763–788. https://doi.org/10.2307/2527399
- Gavin, M. (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8(2), 181–200. https://doi.org/10.1016/0261-5606(89)90022-3
- Ghosh, S. (2016). Political transition and bank performance: How important was the Arab Spring? Journal of Comparative Economics, 44(2), 372–382. https://doi.org/10.1016/j.jce.2015.02.001
- Hung, N. T. (2020). Stock market volatility and exchange rate movements in the Gulf Arab countries: A Markov-state switching model. Journal of Islamic Accounting and Business Researchh, 11(9), 1969–1987.
- Hung, N. T. (2022). Spillover effects between stock prices and exchange rates for the Central and Eastern European countries. Global Business Review, 23(2), 259–286. https://doi.org/10.1177/0972150919869772
- Kanas, A. (2005). Regime linkages between the Mexican currency market and emerging equity markets. Economic Modelling, 22(1), 109–125. https://doi.org/10.1016/j.econmod.2004.05.003
- Korley, M., & Giouvris, E. (2021). The regime-switching behaviour of exchange rates and frontier stock market prices in Sub-Saharan Africa. Journal of Risk and Financial Management, 14(3), 1–30. https://doi.org/10.3390/jrfm14030122
- Krolzig, H.-M. (1997). The Markov-switching vector autoregressive model. In Markov-Switching Vector Autoregressions: Modelling, Statistical Inference, and Application to Business Cycle Analysis (pp. 6–28). Berlin, Heidelberg: Springer Berlin Heidelberg. https://doi.org/10.1007/978-3-642-51684-9_2
- Lütkepohl, H. (1982). Non-causality due to omitted variables. Journal of Econometrics, 19(2), 367–378. https://doi.org/10.1016/0304-4076(82)90011-2
- Mechri, N., de Peretti, C., & Hamad, S. B. (2022). The impact of the exchange rate volatility on stock markets dynamics in Tunisia and Turkey: An artificial neural network analysis. Global Economics Science, 3(1), 1–21. https://doi.org/10.37256/ges.312022798
- Mensi, W., Reboredo, J. C., & Ugolini, A. (2021). Price-switching spillovers between gold, oil, and stock markets: Evidence from the USA and China during the COVID-19 pandemic. Resources Policy, 73, 102217. https://doi.org/10.1016/j.resourpol.2021.102217
- Moussa, F. M., & Delhoumi, E. (2021). The asymmetric impact of interest and exchange rate on the stock market index: Evidence from MENA region. International Journal of Emerging Markets, ahead-of-p(ahead-of-print). https://doi.org/10.1108/IJOEM-01-2020-0089
- Mroua, M., & Trabelsi, L. (2020). Causality and dynamic relationships between exchange rate and stock market indices in BRICS countries: Panel/GMM and ARDL analyses. Journal of Economics, Finance and Administrative Science, 25(50), 395–412. https://doi.org/10.1108/JEFAS-04-2019-0054
- Nouira, R., Amor, T. H., & Rault, C. (2019). Oil price fluctuations and exchange rate dynamics in the MENA region: Evidence from non-causality-in-variance and asymmetric non-causality tests. The Quarterly Review of Economics and Finance, 73(C), 159–171. https://doi.org/10.1016/j.qref.2018.07.011
- Raji, J. O., Abdulkadir, R. I., & Badru, B. O. (2018). Dynamic relationship between Nigeria-US exchange rate and crude oil price. African Journal of Economic and Management Studies, 9(2), 213–230. https://doi.org/10.1108/AJEMS-06-2017-0124
- Roubaud, D., & Arouri, M. (2018). Oil prices, exchange rates and stock markets under uncertainty and regime-switching. Finance Research Letters, 27(C), 28–33. https://doi.org/10.1016/j.frl.2018.02.032
- Salisu, A. A., Cuñado, J., Isah, K., & Gupta, R. (2021). Oil price and exchange rate behaviour of the BRICS. Emerging Markets Finance and Trade, 57(7), 2042–2051. https://doi.org/10.1080/1540496X.2020.1850440
- Salisu, A. A., & Ndako, U. B. (2018). Modelling stock price–exchange rate nexus in OECD countries: A new perspective. Economic Modelling, 74, 105–123. https://doi.org/10.1016/j.econmod.2018.05.010
- Sosa, M., Ortiz, E., & Cabello, A. (2018). Dynamic linkages between stock market and exchange rate in MILA countries: A markov regime switching approach (2003-2016). Revista de Analisis Economico, 33(83), 57–74. https://doi.org/10.24275/uam/azc/dcsh/ae/2018v33n83/Sosa
- Syahri, A., & Robiyanto, R. (2020). The correlation of gold, exchange rate, and stock market on Covid-19 pandemic period. Jurnal Keuangan Dan Perbankan, 24(3), 350–362. https://doi.org/10.26905/jkdp.v24i3.4621
- Tiryaki, A., Ceylan, R., & Erdoğan, L. (2019). Asymmetric effects of industrial production, money supply and exchange rate changes on stock returns in Turkey. Applied Economics, 51(20), 2143–2154. https://doi.org/10.1080/00036846.2018.1540850
- Vogler, S., Schneider, P., & Zimmermann, N. (2019). Preparing price studies - Key methodological decisions. In Sabine Vogler (Ed.), Medicine price surveys, analyses and comparisons: Evidence and methodology guidance (pp. 269–318). Cambridge: Academic Press. https://doi.org/10.1016/B978-0-12-813166-4.00015-2
- Xie, Z., Chen, S.-W., & Wu, A.-C. (2020). The foreign exchange and stock market nexus: New international evidence. International Review of Economics & Finance, 67, 240–266. https://doi.org/10.1016/j.iref.2020.01.001
References
Aggarwal, R. (1981). Exchange rates and stock prices: A study of the US capital markets under floating exchange rates. Akron Business and Economic Review, 12, 7–12.
Ahmed, N. (2018). The effect of the financial crisis on the dynamic relation between foreign exchange and stock returns. Journal of Economic Studies, 45(5), 994–1031. https://doi.org/10.1108/JES-10-2017-0308
Ahmed, N. H. S. (2019). Exchange rate volatility and tourism stock prices: Evidence from Egypt. Journal of Association of Arab Universities for Tourism and Hospitality, 17(2), 55–68. https://doi.org/10.21608/JAAUTH.2019.91944
Al-Muharrami, S. (2015). Arab banks during tranquil and turbulent times: A reflection of Arab economies. Mediterranean Journal of Social Sciences, 6(4), 200. https://doi.org/10.5901/mjss.2015.v6n4p200
Al-Qaralleh, O. (2020). Social movements and corporate social disclosure: Evidence from Jordan. University of Essex.
Andriansyah, A., & Messinis, G. (2019). Stock prices, exchange rates and portfolio equity flows: A Toda-Yamamoto panel causality test. Journal of Economic Studies, 46(2), 399–321.
Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 18, 136–141. https://doi.org/10.1016/j.frl.2016.04.011
Bal, D. P., & Rath, B. N. (2015). Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India. Energy Economics, 51, 149–156. https://doi.org/10.1016/j.eneco.2015.06.013
Bildirici, M. E., & Turkmen, C. (2015). Nonlinear causality between oil and precious metals. Resources Policy, 46, 202–211. https://doi.org/10.1016/j.resourpol.2015.09.002
Blau, B. M. (2018). Exchange rate volatility and the stability of stock prices. International Review of Economics & Finance, 58, 299–311. https://doi.org/10.1016/j.iref.2018.04.002
Branson, W. H. (1981). Macroeconomic determinants of real exchange rates (NBER Working Paper No. 0801). https://doi.org/10.3386/w0801
Chau, F., Deesomsak, R., & Wang, J. (2014). Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries. Journal of International Financial Markets, Institutions and Money, 28, 1–19. https://doi.org/10.1016/j.intfin.2013.10.008
Chkili, W., & Nguyen, D. K. (2014). Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries. Research in International Business and Finance, 31, 46–56. https://doi.org/10.1016/j.ribaf.2013.11.007
Dahir, A. M., Mahat, F., Ab Razak, N. H., & Bany-Ariffin, A. N. (2018). Revisiting the dynamic relationship between exchange rates and stock prices in BRICS countries: A wavelet analysis. Borsa Istanbul Review, 18(2), 101–113. https://doi.org/10.1016/j.bir.2017.10.001
Dornbusch, R., & Fischer, S. (1980). Exchange rates and the current account. American Economic Review, 70(5), 960–971.
El-Masry, A., & Badr, O. (2020). Stock market performance and foreign exchange market in Egypt: Does 25th January revolution matter? International Journal of Emerging Markets, 16(6), 1048–1076. https://doi.org/10.1108/IJOEM-11-2017-0477
Franck, P., & Young, A. (1972). Stock price reaction of multinational firms to exchange realignments. Financial Management, 1(3), 66–73. https://doi.org/10.2307/3665374
Frankel, J. (1983). Monetary and portfolio-balance models of exchange rate determination. In Economic interdependence and flexible exchange rates. MIT Press. Retrieved from http://www.hks.harvard.edu/fs/jfrankel/Monetary%5C&PB%5C Models%5C ExRateDetermtn.pdf
Garcia, R. (1998). Asymptotic null distribution of the likelihood ratio test in Markov switching models. International Economic Review, 39(3), 763–788. https://doi.org/10.2307/2527399
Gavin, M. (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8(2), 181–200. https://doi.org/10.1016/0261-5606(89)90022-3
Ghosh, S. (2016). Political transition and bank performance: How important was the Arab Spring? Journal of Comparative Economics, 44(2), 372–382. https://doi.org/10.1016/j.jce.2015.02.001
Hung, N. T. (2020). Stock market volatility and exchange rate movements in the Gulf Arab countries: A Markov-state switching model. Journal of Islamic Accounting and Business Researchh, 11(9), 1969–1987.
Hung, N. T. (2022). Spillover effects between stock prices and exchange rates for the Central and Eastern European countries. Global Business Review, 23(2), 259–286. https://doi.org/10.1177/0972150919869772
Kanas, A. (2005). Regime linkages between the Mexican currency market and emerging equity markets. Economic Modelling, 22(1), 109–125. https://doi.org/10.1016/j.econmod.2004.05.003
Korley, M., & Giouvris, E. (2021). The regime-switching behaviour of exchange rates and frontier stock market prices in Sub-Saharan Africa. Journal of Risk and Financial Management, 14(3), 1–30. https://doi.org/10.3390/jrfm14030122
Krolzig, H.-M. (1997). The Markov-switching vector autoregressive model. In Markov-Switching Vector Autoregressions: Modelling, Statistical Inference, and Application to Business Cycle Analysis (pp. 6–28). Berlin, Heidelberg: Springer Berlin Heidelberg. https://doi.org/10.1007/978-3-642-51684-9_2
Lütkepohl, H. (1982). Non-causality due to omitted variables. Journal of Econometrics, 19(2), 367–378. https://doi.org/10.1016/0304-4076(82)90011-2
Mechri, N., de Peretti, C., & Hamad, S. B. (2022). The impact of the exchange rate volatility on stock markets dynamics in Tunisia and Turkey: An artificial neural network analysis. Global Economics Science, 3(1), 1–21. https://doi.org/10.37256/ges.312022798
Mensi, W., Reboredo, J. C., & Ugolini, A. (2021). Price-switching spillovers between gold, oil, and stock markets: Evidence from the USA and China during the COVID-19 pandemic. Resources Policy, 73, 102217. https://doi.org/10.1016/j.resourpol.2021.102217
Moussa, F. M., & Delhoumi, E. (2021). The asymmetric impact of interest and exchange rate on the stock market index: Evidence from MENA region. International Journal of Emerging Markets, ahead-of-p(ahead-of-print). https://doi.org/10.1108/IJOEM-01-2020-0089
Mroua, M., & Trabelsi, L. (2020). Causality and dynamic relationships between exchange rate and stock market indices in BRICS countries: Panel/GMM and ARDL analyses. Journal of Economics, Finance and Administrative Science, 25(50), 395–412. https://doi.org/10.1108/JEFAS-04-2019-0054
Nouira, R., Amor, T. H., & Rault, C. (2019). Oil price fluctuations and exchange rate dynamics in the MENA region: Evidence from non-causality-in-variance and asymmetric non-causality tests. The Quarterly Review of Economics and Finance, 73(C), 159–171. https://doi.org/10.1016/j.qref.2018.07.011
Raji, J. O., Abdulkadir, R. I., & Badru, B. O. (2018). Dynamic relationship between Nigeria-US exchange rate and crude oil price. African Journal of Economic and Management Studies, 9(2), 213–230. https://doi.org/10.1108/AJEMS-06-2017-0124
Roubaud, D., & Arouri, M. (2018). Oil prices, exchange rates and stock markets under uncertainty and regime-switching. Finance Research Letters, 27(C), 28–33. https://doi.org/10.1016/j.frl.2018.02.032
Salisu, A. A., Cuñado, J., Isah, K., & Gupta, R. (2021). Oil price and exchange rate behaviour of the BRICS. Emerging Markets Finance and Trade, 57(7), 2042–2051. https://doi.org/10.1080/1540496X.2020.1850440
Salisu, A. A., & Ndako, U. B. (2018). Modelling stock price–exchange rate nexus in OECD countries: A new perspective. Economic Modelling, 74, 105–123. https://doi.org/10.1016/j.econmod.2018.05.010
Sosa, M., Ortiz, E., & Cabello, A. (2018). Dynamic linkages between stock market and exchange rate in MILA countries: A markov regime switching approach (2003-2016). Revista de Analisis Economico, 33(83), 57–74. https://doi.org/10.24275/uam/azc/dcsh/ae/2018v33n83/Sosa
Syahri, A., & Robiyanto, R. (2020). The correlation of gold, exchange rate, and stock market on Covid-19 pandemic period. Jurnal Keuangan Dan Perbankan, 24(3), 350–362. https://doi.org/10.26905/jkdp.v24i3.4621
Tiryaki, A., Ceylan, R., & Erdoğan, L. (2019). Asymmetric effects of industrial production, money supply and exchange rate changes on stock returns in Turkey. Applied Economics, 51(20), 2143–2154. https://doi.org/10.1080/00036846.2018.1540850
Vogler, S., Schneider, P., & Zimmermann, N. (2019). Preparing price studies - Key methodological decisions. In Sabine Vogler (Ed.), Medicine price surveys, analyses and comparisons: Evidence and methodology guidance (pp. 269–318). Cambridge: Academic Press. https://doi.org/10.1016/B978-0-12-813166-4.00015-2
Xie, Z., Chen, S.-W., & Wu, A.-C. (2020). The foreign exchange and stock market nexus: New international evidence. International Review of Economics & Finance, 67, 240–266. https://doi.org/10.1016/j.iref.2020.01.001