An investigation of the effects of foreign exchange market shocks on Tehran stock exchange by Markov regime switching model

Subject Areas : Applied Economics

عبدالناصر شجاعی ¹ (مسئول مکاتبات)
محسن خضری ² (ندارد)
تورج بیگی ³ (ندارد)

Received: 2011-08-25 Accepted : 2011-10-25 Published : 2011-09-23

Keywords: Exchange Market Shocks, Exchange Regime, Markov Switching, Tehran stock market,

Abstract :

Several studies have been accomplished  about the relationship between the  exchange rate volatilities and stock market behavior. In theoretical methods, there is no general agreement about the relationship of foreign exchange market and stock market. This paper which is based on a two regime MS-EGARCH(1,1) and with using monthly data between 2000 to 2010 intends to investigate this topic. According to estimation results, the first regime is related to variance regime and low average (recession)and the second regime is related to variance and high average (expansion). In average regime and low variance, foreign exchange market shocks had positive effect on stock return variance but it did not have any effect on the level of average return of stock market. But in variance regime and high average it did not have any significant positive effect on the level of variance and the level of stock return average. The above results showed the asymmetrical effects of foreign exchange market shocks on stock return in two stagnation regime and expansion regime.