The Quantile Regression Approach to Analysis of Dynamic Interaction Between Exchange Rate and Stock Returns in Emerging Markets: Case of BRIC Nations
The IUP Journal of Financial Risk Management, Vol. XIII, No. 1, March 2016, pp. 7-27
Posted: 11 Aug 2016
Date Written: March 2016
The present paper examines the dynamic interaction between stock returns and exchange rate changes in the emerging economies of BRIC (Brazil, Russia, India and China). The paper tries to analyze the portfolio balance effect according to which the two variables are expected to be negatively related. Since under non-normality conditions and heterogeneous conditional distribution, estimation using Ordinary Least Squares (OLS) method may be biased and not much favorable, quantile regression model is adopted to analyze the relationship between stock returns and exchange rate changes. The estimation shows similar patterns with significantly negative coefficients obtained from different quantile functions for Brazil, Russia and India. However, for China the coefficients are not so significantly negative. The negative coefficients indicate adherence of markets to portfolio balance effect. However, the coefficients can vary according to changing market conditions.
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