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Title: |
Non-linearities, Regime Switching and the
Relationship between Asian Equity and Foreign Exchange Markets |
| Author: |
Holmes, Mark
J.; Maghrebi, Nabil |
| Author
Affiliation: |
Loughborough U;
Wakayama U |
| Source: |
International Economic Journal, Winter 2002, v. 16, no. 4, pp. 121-139 |
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Publication Date: |
Winter 2002 |
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Abstract: |
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. |
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