Non-Linearities, Regime Switching and the Relationship Between Asian Equity and Foreign Exchange Markets^*

Sources of time-varying exchange rate exposure

“…Second, we have assumed that the link between stock market returns and exchange rate movements is linear. Because some authors have studied nonlinearities in exchange rate exposure (Holmes and Magrebi 2002;Kizys and Pierdzioch 2007), it is interesting to complement our analysis in future research by taking into account such nonlinearities. Third, we have been concerned with the variation over time in the exchange rate exposure of national stock market indexes.…”

“…Beginning with Adler and Dumas (1984), much substantial theoretical and empirical research has been done to trace out potential sources of exchange rate exposure. Our research contributes to the literature that examines the sources of exchange rate exposure of national stock market indexes (Friberg and Nydahl 1999;Holmes and Magrebi 2002;Kizys and Pierdzioch 2007, to name just a few).…”

Regime-Dependent Effects on Stock Market Return Dynamics: Evidence from SAARC Countries

“…Despite a sizeable amount of literature examining this relationship, the number using MS models are extremely limited. One such study that employed the Markov regim-switching model was Holmes and Nabil (2002), who revealed that Asian stock markets are regime-dependent when affected by currency devaluations: the Asian exchange rate crisis led to significant widespread volatility, indicated by the frequency of regime switches. In addition, Flavin et al (2008) noticed that shocks in the East Asian region, instigated by either currency or stock market, spread to and manipulated other markets in turbulent environments.…”

“…There are a growing number of studies indicating that the regime-switching process represents stock market returns (e.g., Hamilton, 1989;Schwert, 1989;Turner et al, 1989;Hamilton and Susmel, 1994;Schaller and Norden, 1997;Ang and Bekaert, 1999). There are also a small number of studies on the relationship between stock market returns and exchange rate fluctuations (e.g., Holmes and Nabil, 2002;Chkili and Nguyen, 2014).…”