The effect of exchange rate volatility on the stock market: Markov Switching model approach

The situation of the country's currencies against the markets of the countries and the money of other countries is one of the indicators that investors can obtain information about the country's economy. The fact that financial markets are developed is a factor that increases confidence in the country's economy. The fact that the markets contain companies from many sectors, investors' expectations and the potential to attract foreign investors cause it to be affected by macroeconomic indicators such as the exchange rate. This study examines the effects of changes in the US exchange rate on twenty-three emerging stock markets and fluctuation regimes. Daily data from April 2015 to December 2019 were used as the data set. For this purpose, Markov Regime Variation Vector Autoregressive Model (MS-VAR), which is used to detect fluctuation periods, was used. With this method, fluctuation regimes, transition probabilities between regimes, and residence times in the regime were determined. The analysis determined whether the series were stationary or not, and then the linear model was applied. As stated in the literature, made a comparison to determine whether the MS-VAR Model's explanatory power was better than the Linear Model. For each country, the MS-VAR Model was found to explain the effect between variables better. Pakistan and Qatar did not include in the analysis due to the lack of data on the equity markets. The research could not be made because the relationship between the exchange rate and the Saudi Arabian share market could not be determined. Three regimes were identified for three countries (Colombia, Mexico, Egypt), and two regimes were identified in other countries. In ten countries, it is seen that the first regime is the "expansion regime" and the second regime is the "moderate growth period". In seven countries, the second regime appears to be "expansion period". It has been determined that the first regime has a "moderate growth period" in five of these seven countries, and a "depression period" in two countries. In the three-regime countries, the third period of the two countries is the "expansion period". When the dates of the regime changes were examined, it was determined that regime changes were observed in different countries for different dates and different reasons.