Munich Personal RePEc Archive

Stock market volatility and exchange rates: MGARCH-DCC and wavelet approaches

Hashim, Khairul Khairiah and Masih, Mansur (2015): Stock market volatility and exchange rates: MGARCH-DCC and wavelet approaches.

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Abstract

This study discusses the relationship between stock price index and exchange rate in Malaysia. Establishing the relationship between stock prices and exchange rate is important for several reasons. Firstly, it may affect the economic decisions in terms of monetary policy and fiscal policy. Secondly, by understanding the relationship of stock prices and exchange rate, it will assist to predict the possibility of financial downturn. This study makes an attempt to examine the positive or negative relationship between stock prices and exchange rate. The causality between stock price and exchange rate is important in order to assist in making economic decision. This study employs MGARCH-DCC and wavelet approach, more specifically the continuous wavelet transform (CWT) and maximum overlap discrete wavelet transform (MODWT). The earlier studies used time-domain framework in their search for a relationship when the true relations might exist at different frequencies. The findings show that there is negative relationship between stock prices index and exchange rate in the case of Malaysia for both Islamic and conventional stock indices. The stock price index leads exchange rate in the long term investment horizon. This empirical research may have several implications for traders, portfolio managers and policymakers. It can be helpful for the traders in explaining the flow of information between stock and foreign exchange markets.

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