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Title: Non-linearities, regime switching and the relationship between Asian equity and foreign exchange markets
Authors: Holmes, Mark J.
Maghrebi, Nabil
Issue Date: 2002
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.
Description: Economics Research Paper, no.02-02
URI: https://dspace.lboro.ac.uk/2134/359
Appears in Collections:Working Papers (Economics)

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