The Regime Changing Behavior of Exchange Rates and Stock Market Prices of Selected Emerging Countries: An application of the Markov Switching Vector Autoregressive model (MS-VAR)

Abstract

This article aims to analyze the dynamic relationship between stock market returns and exchange rate movements for emerging countries (Brazil, Argentina, Mexico and India), from January 2005 to December 2021, using Markov Switching Vector Autoregressive model, with regime change. The impact of exchange rate movements on stock returns is not statistically significant in all emerging countries. This reveals that fluctuations in US dollar exchange rates do not have a strong influence on the dynamics of stock market returns during normal and turbulent periods. On the other hand, the impacts of stock returns on exchange rate movements are significant only for the Brazilian and Mexican markets.