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A Markov switching SVAR analysis on the relationship between exchange rate changes and stock returns in China

Author

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  • Juan Carlos Cuestas
  • Bo Tang

Abstract

Purpose - This study investigates the spillover effects between exchange rate changes and stock returns in China. The authors find that no significant interconnections exist between stock returns and exchange rates changes. Design/methodology/approach - Although the conventional structural VAR (SVAR) approach fails to examine the contemporaneous effects, the Markov switching SVAR model captures the volatile structure of the Chinese financial market. The regime-switching estimates indicate that volatile structure tends to be significant during two financial crisis periods. Findings - Notwithstanding the fact that exchange rate changes cannot Granger-cause stock returns in the long run, its contemporaneous spillover effects on stock returns are found to be statistically significant. Originality/value - This study aims to shed light on the spillover effects between exchange rate changes and stock returns in China, as the Chinese currency is becoming flexible and China’s stock market has undertaken important reforms. The spillovers between the two markets are of topical importance due to the increasing connections between China and the global economy.

Suggested Citation

  • Juan Carlos Cuestas & Bo Tang, 2020. "A Markov switching SVAR analysis on the relationship between exchange rate changes and stock returns in China," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 16(3), pages 625-642, April.
    • Handle: RePEc:eme:ijoemp:ijoem-06-2019-0463
    DOI: 10.1108/IJOEM-06-2019-0463
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    Citations

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    Cited by:

    1. Tian, Maoxi & El Khoury, Rim & Alshater, Muneer M., 2023. "The nonlinear and negative tail dependence and risk spillovers between foreign exchange and stock markets in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    2. Huachen Li & Tiezheng Song, 2024. "Regime dependent dynamics of parallel and official exchange markets in China: evidence from cryptocurrency," Applied Economics, Taylor & Francis Journals, vol. 56(41), pages 4952-4973, September.
    3. Muhammad Kamran Khan & Jian‐Zhou Teng & Muhammad Imran Khan & Muhammad Fayaz Khan, 2023. "Stock market reaction to macroeconomic variables: An assessment with dynamic autoregressive distributed lag simulations," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2436-2448, July.

    More about this item

    Keywords

    Exchange rate changes; Stock returns; Markov switching SVAR; C32; C580; F31;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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