The Effect of Exchange Rate Fluctuations on the Stock Return Risk of Mining, Automotive and Cement Index based on the Regime Transmission of Markov

Subject Areas : Financial engineering

Mehdi Zolfagari ¹ , Bahram Sahabi ²

1 - Ph.D. student of financial Tarbiat Modarres University
2 - Department of Economics, University of Tarbiat Modarres

Received: 2016-03-05 Accepted : 2016-05-07 Published : 2016-12-21

Keywords: Risk, exchange rate, GARCH Family, Markov Chain Process,

Abstract :

In capital market, currency fluctuations impacts on  changes in financial asset prices such as stock. However, Considering the importance of The return risk of stock (rather than price) for market participants, the question arises that in addition to the impact of exchange rate changes on stock price volatility, does the exchange rate has a significant effect on the risk of the stock returns in periods time of short and long term? And whether this effect is same extent or is different in different states in terms of stock price behavior? To answer these two questions is necessary to extract the return risk of stock in different regimes. Thus, the present study attempted to use parametric models based on Markov-switching approach to extract of the return risk of the selected industry index (automotive, mining, cement) in the two different regimes. After extraction of the risk time series we estimate the effect of exchange rate fluctuations on the industry risk time series by using the econometric model ARDL risk in terms of different regimes. The results showed that time series of the return risk follow from regime transition and have got asymmetric reactions of external shocks. Oslo time series of the industry index return risk significantly effect from exchange rate fluctuations in the short-term and long-term.