An Analysis on the Relationship between Exchange Rate and Stock Prices in the Short-Run and Long-Run: NARDL Model Results for the Kuwait Economy

Year 2020, Volume: 10 Issue: 2, 397 - 426, 25.12.2020

Afşin Şahin Mabruka Mohamed

https://doi.org/10.18074/ckuiibfd.636490

Abstract

Abstract. The efficiency of
the stock market is tested by linear and non-linear methods benefiting from
variables such as exchange rate, interest rate, money supply, and commodity
prices. This paper specifically focuses on the exchange rate variable for an
oil producer country, Kuwait, and tries to estimate parameters using the Classical
Linear Regression Model, Autoregressive Distributed Lag Model and Nonlinear
Autoregressive Distributed Lag Model. According to nonlinear results, we
explore that macroeconomic and financial variables are inextricably interwined with
stock prices. In this respect, exchange rate substantial harbinger considering
magnitude and asymmetry. The results put forward in this study indicate a
cointegration relationship, a short-run and long-run asymmetry between exchange
rate and stock prices. Although the linear model indicates that an appreciation
of the local currency increases stock prices in the short-run, the nonlinear
model reveals a drop in stock prices significantly in the long-run.        

Keywords

Exchange Rate, Stock Price, Nonlinear ARDL, Kuwait

Döviz Kuru ve Hisse Senedi Fiyatları Arasındaki İlişkinin Kısa ve Uzun Dönemde İncelenmesi: Kuveyt Ekonomisi için NARDL Modeli Bulguları

Abstract

Abstract. The efficiency of
the stock market is tested by linear and non-linear methods benefiting from
variables such as exchange rate, interest rate, money supply, and commodity
prices. This paper specifically focuses on the exchange rate variable for an
oil producer country, Kuwait, and tries to estimate parameters using the Classical
Linear Regression Model, Autoregressive Distributed Lag Model and Nonlinear
Autoregressive Distributed Lag Model. According to nonlinear results, we
explore that macroeconomic and financial variables are inextricably interwined with
stock prices. In this respect, exchange rate substantial harbinger considering
magnitude and asymmetry. The results put forward in this study indicate a
cointegration relationship, a short-run and long-run asymmetry between exchange
rate and stock prices. Although the linear model indicates that an appreciation
of the local currency increases stock prices in the short-run, the nonlinear
model reveals a drop in stock prices significantly in the long-run.        

Keywords

Exchange Rate, Stock Prices, Nonlinear ARDL, Kuwait

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