Stock market volatility and exchange rate movements in the Gulf Arab countries: a Markov-state switching model
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 20 August 2020
Issue publication date: 6 December 2020
Abstract
Purpose
This paper aims to investigate the dynamic linkage between stock prices and exchange rate changes for the Gulf Arab countries (Kuwait, Qatar, Saudi Arabia and United Arab Emirates [UAE]).
Design/methodology/approach
The author uses the Markov-switching autoregression to detect regime-shift behavior in the stock returns of the Gulf Arab countries and Markov-switching vector autoregressive (MS-VAR) model to capture the dynamic interrelatedness between exchange and stock returns over the period 2000–2018.
Findings
This study’s analysis finds evidence to support the persistence of two distinct regimes for all markets, namely, a low-volatility regime and a high-volatility regime. The low-volatility regime illustrates more persistence than the high-volatility regime. Specifically, exchange rate changes do not have an influence on the stock market returns of the Gulf Arab countries, regardless of the regimes. On the other hand, stock market returns have a substantial impact on exchange markets for all countries, except Saudi Arabia, and it is more noticeable during the regime of high volatility.
Practical implications
The findings shed light on the interconnectedness between two of the most important financial markets in the complex international financial environment. They are thus of particular interest for economic policymakers and portfolio investors.
Originality/value
The author distinguishes this study from previous studies in several ways. First, while previous empirical studies of the dynamic linkage between stock prices and foreign exchange markets are primarily devoted to developed markets or emerging markets, this study’s interest is concentrated on four Gulf Arab financial markets (Kuwait, Qatar, Saudi Arabia and UAE). Second, unlike most investigations in the literature that only estimate this link for the whole period, this study attempts to estimate during the good and bad period by using a two-regime MS-VAR model. To the best of the author’s knowledge, this is the first study of the Gulf Arab countries on the stock and foreign exchange markets to apply this model.
Keywords
Acknowledgements
Funding: The author received no financial support for the research, authorship and/or publication of this article.
The author is grateful to Editors and the anonymous referees of the journal for their extremely useful suggestions to improve the quality of the article. Usual disclaimers apply.
Citation
Thai Hung, N. (2020), "Stock market volatility and exchange rate movements in the Gulf Arab countries: a Markov-state switching model", Journal of Islamic Accounting and Business Research, Vol. 11 No. 10, pp. 1969-1987. https://doi.org/10.1108/JIABR-01-2020-0004
Publisher
:Emerald Publishing Limited
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