The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa. / Korley, Maud; Giouvris, Evangelos.

In: Journal of Risk and Financial Management, Vol. 14, No. 3, 122, 15.03.2021, p. 1-30.

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The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa. / Korley, Maud; Giouvris, Evangelos.

In: Journal of Risk and Financial Management, Vol. 14, No. 3, 122, 15.03.2021, p. 1-30.

Research output: Contribution to journalArticlepeer-review

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@article{69e4e8da56484c90822956674be5d0a4,
title = "The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa",
abstract = "Frontier markets have become increasingly investible, providing diversification opportunities; however, there is very little research (with conflicting results) on the relationship between Foreign Exchange (FX) and frontier stock markets. Understanding this relationship is important for both international investor and policymakers. The Markov-switching Vector Auto Regressive (VAR) model is used to examine the relationship between FX and frontier stock markets. There are two distinct regimes in both the frontier stock market and the FX market: a low-volatility and a high-volatility regime. In contrast with emerging markets characterised by “high volatility/low return”, frontier stock markets provide high (positive) returns in the high-volatility regime. The high-volatility regime is less persistent than the low-volatility regime, contrary to conventional wisdom. The Markov Switching VAR model indicates that the relationship between the FX market and the stock market is regime-dependent. Changes in the stock market have a significant impact on the FX market during both normal (calm) and crisis (turbulent) periods. However, the reverse effect is weak or nonexistent. The stock-oriented model is the prevalent model for Sub-Saharan African (SSA) countries. Irrespective of the regime, there is no relationship between the stock market and the FX market in Cote d{\textquoteright}Ivoire. Our results are robust in model selection and degree of comovement.",
author = "Maud Korley and Evangelos Giouvris",
year = "2021",
month = mar,
day = "15",
doi = "10.3390/jrfm14030122",
language = "English",
volume = "14",
pages = "1--30",
journal = "Journal of Risk and Financial Management",
issn = "1911-8074",
publisher = "MDPI",
number = "3",

}

RIS

TY - JOUR

T1 - The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa

AU - Korley, Maud

AU - Giouvris, Evangelos

PY - 2021/3/15

Y1 - 2021/3/15

N2 - Frontier markets have become increasingly investible, providing diversification opportunities; however, there is very little research (with conflicting results) on the relationship between Foreign Exchange (FX) and frontier stock markets. Understanding this relationship is important for both international investor and policymakers. The Markov-switching Vector Auto Regressive (VAR) model is used to examine the relationship between FX and frontier stock markets. There are two distinct regimes in both the frontier stock market and the FX market: a low-volatility and a high-volatility regime. In contrast with emerging markets characterised by “high volatility/low return”, frontier stock markets provide high (positive) returns in the high-volatility regime. The high-volatility regime is less persistent than the low-volatility regime, contrary to conventional wisdom. The Markov Switching VAR model indicates that the relationship between the FX market and the stock market is regime-dependent. Changes in the stock market have a significant impact on the FX market during both normal (calm) and crisis (turbulent) periods. However, the reverse effect is weak or nonexistent. The stock-oriented model is the prevalent model for Sub-Saharan African (SSA) countries. Irrespective of the regime, there is no relationship between the stock market and the FX market in Cote d’Ivoire. Our results are robust in model selection and degree of comovement.

AB - Frontier markets have become increasingly investible, providing diversification opportunities; however, there is very little research (with conflicting results) on the relationship between Foreign Exchange (FX) and frontier stock markets. Understanding this relationship is important for both international investor and policymakers. The Markov-switching Vector Auto Regressive (VAR) model is used to examine the relationship between FX and frontier stock markets. There are two distinct regimes in both the frontier stock market and the FX market: a low-volatility and a high-volatility regime. In contrast with emerging markets characterised by “high volatility/low return”, frontier stock markets provide high (positive) returns in the high-volatility regime. The high-volatility regime is less persistent than the low-volatility regime, contrary to conventional wisdom. The Markov Switching VAR model indicates that the relationship between the FX market and the stock market is regime-dependent. Changes in the stock market have a significant impact on the FX market during both normal (calm) and crisis (turbulent) periods. However, the reverse effect is weak or nonexistent. The stock-oriented model is the prevalent model for Sub-Saharan African (SSA) countries. Irrespective of the regime, there is no relationship between the stock market and the FX market in Cote d’Ivoire. Our results are robust in model selection and degree of comovement.

U2 - 10.3390/jrfm14030122

DO - 10.3390/jrfm14030122

M3 - Article

VL - 14

SP - 1

EP - 30

JO - Journal of Risk and Financial Management

JF - Journal of Risk and Financial Management

SN - 1911-8074

IS - 3

M1 - 122

ER -