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Non-linearities, regime switching and the relationship between Asian equity and foreign exchange markets

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posted on 12.08.2005 by Mark J. Holmes, Nabil Maghrebi
This paper explores the possibility of a non-linear relationship between Asian equity and foreign exchange markets. The non-linearity is modeled using a regime-switching Markov model. We find evidence of non-linearities where the effect of changes in the exchange rate on stock market returns is regime-dependent except for Hong Kong whose strong currency peg contributes into the segmentation of its stock and foreign exchange markets. Using a quadratic approximation, we find only limited evidence of non-linearities within each regime. The results lend little support to the proposition that moderate depreciations are associated with increases in stock returns while large ones, short of a currency crash, have negative effects on equity markets.

History

School

  • Business and Economics

Department

  • Economics

Pages

228079 bytes

Publication date

2002

Notes

Economics Research Paper, no.02-02

Language

en

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Keyword(s)

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