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

Yıl 2020, , 397 - 426, 25.12.2020

Afşin Şahin , Mabruka Mohamed

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

Cited By: 1

Öz

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.        

Anahtar Kelimeler

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

Öz

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.        

Anahtar Kelimeler

Exchange Rate, Stock Prices, Nonlinear ARDL, Kuwait

Kaynakça

• Abdalla I, Murinde V (1997) Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines. Appl Fin Econ 7: 25-35.
• Abouwafia, HE, Chambers MJ (2015) Monetary policy, exchange rates and stock prices in the Middle East region. Inte Rev Finan Anal 37: 14-28.
• Al-Naif K (2017) The relationship between interest rate and stock market index: Empirical evidence from Arabian countries. Research Journal of Finance and Accounting 8: 181-191.
• Al-Sharkas A (2004) Dynamic relations between macroeconomic factors and the Jordanian stock market. International Journal Applied Econometrics and Quantitative Studies 1: 97-114.
• Arat K (2003) Analyzing the optimum exchange rate regime selection and exchange rate pass-through to prices in Turkey. Expertise Thesis for Central Bank of the Republic of Turkey, July, Ankara, Turkey.
• Arslan, B (2017) Evaluation of Stock Market Reaction to the Inclusion of Firms in 2016 ISE Sustainability Index, Ankara Yildirim Beyazit University, Master of Banking and Finance, Ankara, Turkey.
• Bahmani-Oskooee M, Sohrabian A (1992) Stock prices and the effective exchange rate of the dollar. Appl Econ 24 :459-464.
• Bahmani-Oskooee M, Sohrabian A (1992) Stock prices and the effective exchange rate of the dollar. Appl Econ 24: 459-464.
• Bahmani-Oskooee M, Saha S (2019a) On the effects of policy uncertainty on stock prices: An asymmetric analysis. Quantitative Finance and Economics 3: 412-424.
• Bahmani-Oskooee M, Saha S (2015) On the relation between stock prices and exchange rates: a review article. J Eco Stud 42:707-732.
• Bahmani-Oskooee M, Ghodsi H (2018) Asymmetric causality between the U.S. housing market and its stock market: Evidence from state level data. J Econ Asymmetries 18.
• Bahmani-Oskooee M, Maki-Nayeri M (2019) Asymmetric effects of policy uncertainty on domestic investment in G7 countries. Open Econ Rev, doi.org/10.1007/s11079-019-09523-z
• Bahmani-Oskooee M, Saha S (2016) Do exchange rate changes have symmetric or asymmetric effects on stock prices. Global Financ J 31: 57–72.
• Bahmani-Oskooee M, Saha S (2019b) On the effects of policy uncertainty on stock prices. J Econ Financ, https://doi.org/10.1007/s12197-019-09471-x.
• Bartram SM (2004) Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations. J Int Money Finance 23:673-699.
• Basher SA, Haug, AA, Sadorsky P (2012) Oil prices, exchange rates and emerging stock markets. Energy Econ 34: 227-240.Benli, M, Durmuskaya S, Bayramoglu G (2019) Asymmetric exchange rate pass-through and sectoral stock price indices: Evidence from Turkey. Int J Bus Manag 7 :25-47.
• Bodie Z, Kane A, Marcus A J (2018) Etkin piyasa hipotezi (Efficient market hypotehsis), In: Yatırımın Temelleri (Essentials of Investment), Translation to Turkish from 9th Edition, Nobel Publications, Ankara, Turkey, pp. 235-264.
• Boonyanam N (2014) Relationship of stock price and monetary variables of Asian small open emerging economy: Evidence from Thailand. Int J Financ Res 5: 52–63.
• Cheah SP, Yiew TH, Ng CF (2017) A nonlinear ARDL analysis on the relation between stock price and exchange rate in Malaysia . Econ. Bull 37: 336-346.
• Cheikh, NB, Naceur MS, Kanaan MO, et al (2018) Oil prices and GCC stock markets: New evidence from smooth transition models, Working Paper.
• Chen NF, Roll R, Ross SA (1986) Economic forces and the stock market . J Bus 59: 383-403.
• Chortareas G, Cipollini A, Eissa, MA (2011) Exchange rates and stock prices in the MENA countries: What role for oil? Rev Dev Econ 15: 758-774.
• Cuestas JC, Tang B (2015) Asymmetric exchange rate exposure of stock returns: Empirical evidence from Chinese Industries Stud Nonlinear Dynam Econometrics 21.
• Dickey DA, Fuller WA (1981) Likelihood ratio statistics for autoregressive time series with a unit root . Econometric Soc 49: 1057-1072.
• Eita JH (2012) Modelling macroeconomic determinants of stock market prices: Evidence from Namibia . The Journal of Applied Business Research 28 :871-884.
• Elafif M, Alsamara MK , Mrabet Z, et al. (2017) The asymmetric effects of oil price on economic growth in Turkey and Saudi Arabia: new evidence from nonlinear ARDL approach. International Journal of Development and Conflict 7: 97-118.
• Engle RF, Granger CW (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55: 251-276.
• Fama EF (1981) Stock returns, real activity, inflation and money. Am Econ Rev 71: 545–565.
• Fisher I (1930) The Theory of Interest Rate. New York: Macmillan. Granger CW (1988) Some Recent Developments in a Concept of Causality. J Econom 39: 199-211.
• Granger CWJ (1969) Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica 37: 424-438.Greene WH (2012) Econometric Analysis, Pearson Education, USA.
• Groenewold N, Paterson JEH (2013) Stock prices and exchange rates in Australia: Are commodity prices the missing link?. Aust Econ Pap 52: 150–170.
• Gujarati, D (2011) Econometrics by Example, USA: Palgrave Macmillan. Hu C, Liu X, Pan B, et al. (2018) Asymmetric impact of oil price shocks on stock market in China: A combination analysis based on SVAR model and NARDL Model. Emerg Mark Financ 54: 1693-1705.
• Hussain A, Rafique M, Khalil A, et al. (2013) Macroeconomic determinants of stock price variations: An economic analysis of KSE-100 index. Pakistan Journal of Humanities and Social Sciences 1: 28-46.
• Huy TQ (2016) The linkage between exchange rates and stock prices: Evidence from Vietnam. Asian Economic and Financial Review 6: 363:373.
• Ibrahim MH Aziz H (2003) Macroeconomic variables and the Malaysian equity market: A view through rolling subsamples. J Econ Stud 30 : 6-27. Ibrahim MH (2000) Cointegration and Granger causality tests of stock price and exchange rate interactions in Malaysia. ASEAN Econ Bull 17 :36-47.
• Inegbedion HE (2012) Macroeconomic determinants of stock price changes: Empirical evidence from Nigeria. Indian Journal of Finance 6 :19-23.
• Ismail MT, Bin Isa Z (2009) Modeling the interactions of stock price and exchange rate in Malaysia. Singap Econ Rev 54: 605-619. Jayashankar M, Rath BN (2017) The dynamic linkage between exchange rate, stock price and interest rate in India. Stud Econ Finance 34: 383-406.
• Johansen S (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59: 1551-1580.
• Khan MK, Teng JZ, Khan MI (2019) Asymmetric impact of oil prices on stock returns in Shanghai stock exchange: Evidence from asymmetric ARDL model. Plos One 14, https://doi.org/10.1371/journal.pone.0218289.
• Kisswani KM, Elian MI (2017) Exploring the nexus between oil prices and sectoral stock prices: Nonlinear evidence from Kuwait stock exchange. Cogent Economics and Finance 5: 1-17.
• Koutmos G, Martin AD (2003) Asymmetric exchange rate exposure: theory and evidence. J Int Money Finance 22: 365-383.
• Kwiatkowski D, Phillips P C, Schmidt P, et al. (1992) Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root?. J Econom 54: 159-178.
• Mishkin FS (2004) The Economics of Money, Banking, and Financial Markets, 7th Eds., New Jersey: Pearson Addison Wesley Publications.
• Mishkin F S (2013) The Economics of Money, Banking and Financial Markets, 10th Eds., New Jersey: Pearson Education Wesley Publications.
• Mukherjee T K, Naka A (1995) Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. J Finan Res 18: 223-237.
• Mutuku C, Ngeny KL (2015) Macroeconomic variables and the Kenyan equity market: A time series analysis. Business and Economic Research 5 :1-10.
• Nwani C, Bassey Orie J (2016) Economic growth in oil-exporting countries: Do stock market and banking sector development matter? Evidence from Nigeria. Cogent Economics and Finance 4: 1-11.
• Pan MS, Fok R C W, Liu YA (2007) Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets. Int Rev Econ Financ 16: 503–520.
• Park J , Ratti R A (2008) Oil price shocks and stock markets in the US and 13 European countries. Energy Econ 30: 2587-2608.
• Parsva, P , Lean H H (2011) The analysis of relationship between stock prices and exchange rates: Evidence from six Middle Eastern financial markets. International research journal of finance and economics 66: 157-171.
• Perron P (1989) The great crash, the oil price shock, and the unit root hypothesis. Econometric Soc: 1361-1401.
• Pesaran M H, Shin Y (1998) An autoregressive distributed-lag modelling approach to cointegration analysis. Econom Soc Monogr 31: 371-413.
• Pesaran M H, Shin Y, Smith R J (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econ 16: 289–326.
• Phillips P C, Perron P (1988) Testing for a unit root in time series regression. Biometrika.75: 335-346.
• Press Releases (2003) New Exchange Policy Launched: CBK Sets the KD/Dollar Parity Rate and Margins of Fluctuations, Central Bank of Kuwait, 05.01.2003. Available at www.cbk.gov.kw.
• Press Releases (2007) The Kuwaiti Dinar (KD) Re-Pegged to a Basket of Currencies. Central Bank of Kuwait, 20.05.2007. Available at www.cbk.gov.kw.
• Qamruzzaman M, Jianguo W (2018) Investigation of the asymmetric relationship between financial innovation, banking sector development, and economic growth. Quant Financ Econ 2: 952-980.
• Rahman AA, Sidek NZ, Tafri FH (2009) Macroeconomic determinants of Malaysian stock market. Afr J Bus Manag 3: 095-106.
• Saha S (2017) Do Exchange Rate Changes Have Symmetric or Asymmetric Effects on Stock Prices?, Phd Thesis at University of Wisconsin-Milwaukee. Sahin A (2016) Short and long - run effects of exchange rate on stock price index: an application to the fragile five countries by smooth transition regression error correction model. (in Turkish). Ege Academic Review 16: 319-349.
• Sahin A (2014) Stock market returns and oil prices relationship revisited. Quo Vadis Social Sciences: Artvin Coruh University International Congress on Social Sciences, Artvin, Turkey, October, 15-17, 2014.
• Sahin A (2018) Staying vigilant of uncertainty to velocity of money: an application for oil‐producing countries. OPEC Energy Rev 42: 170-195.
• Sahin A (2011) The effects of monetary policy on the stock price bubbles: A case study on Turkey (in Turkish). In: Global Economic and Financial Crisis, (Ed.), Ankara, Turkey: Nobel Publication Inc.: 107-155.
• Sahin A, Berument MH (2019) Asymmetric effects of central bank funding on commercial banking sector behaviour. Ekon Istraz 32: 128-147.
• Shin Y, Yu B, Greenwood-Nimmo M (2014) Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In Festschrift in Honor of Peter Schmidt, Springer, New York, NY, 281–314.
• Subburayan B, Srinivasan VD (2014) The effects of macroeconomic variables on CNX bankex returns: Evidence from Indian stock market. Int J Manag Bus Stud 4: 67-71.
• Sultan K, Madah NA, Khalid A (2013) Comparison between Kuwait and Pakistan stock exchange market: Testing weak form of efficient market. Acad Contemp Res J 7 :59-70.
• Tian G G , Ma S (2010) The relationship between stock returns and the foreign exchange rate: the ARDL approach. J Asia Pac Econ 15: 490-508.
• Tiryaki A, Ceylan R, Erdogan L (2019) Asymmetric effects of industrial production, money supply and exchange rate changes on stock returns in Turkey. Appl Econ 51:2143-2154.
• Turksoy T (2017) Causality between stock prices and exchange rates in Turkey: Empirical evidence from the ARDL bounds test and a combined cointegration approach. Int J Financial Stud 5: 8.
• Wongbangpo P, Sharma SC (2002) Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries. J Asian Econ 13: 27-51.
• Yau HY, Nieh, CC (2009) Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan. Jpn World Econ 21: 292-300.