Threshold dynamics and asymmetric adjustment of stock and currency markets returns in Iran

Subject Areas : Journal of Investment Knowledge

sayed yahya abtahi ¹ , hamid khajehmahmoodabadi ²

1 - department of management azad university of yazd
2 - department of management

Received: 2018-02-04 Accepted : 2018-07-24 Published : 2020-08-22

Keywords: asymmetric adjustment, market returns, Threshold dynamics,

Abstract :

Identifying the behavior of prices in financial markets requires attention to the dynamics in the process of adjustment to long-term equilibrium in these markets and attention to this issue is necessary for policy makers of the capital market due to fluctuations of the foreign exchange market in Iran. In this paper, the asymmetric adjustment and dynamic behavior of foreign exchange and stock markets are studied. The results of Threshod vector autoregression and Threshold cointegration models on the relations between these markets indicate that the returns of stock and currency markets are cointegrated with a threshold adjustment, and the process of adjustment when stock and currency markets are adjusted to long-term equilibrium are asymmetric. Also, there is a much lower convergence of positive deviations (above the threshold) of long-term equilibrium with negative deviations (lower thresholds), and the deviation of the return on long-term equilibrium in the stock market in negative errors is adjusted to a higher rate than positive errors. And this adjustment is quite asymmetric and meaningful.

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