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Cluster Computing

, Volume 22, Supplement 1, pp 2039–2048 | Cite as

Modeling and analysis for stock return movements along with exchange rates and interest rates in Markov regime-switching models

  • Suyi Kim
  • So-Yeun Kim
  • Kyungmee ChoiEmail author
Article

Abstract

Since the Asian financial crisis and the global financial crisis, the regime shift behavior has been notable in the stock markets. We examine the effects of interest rates and foreign exchange rates on stock returns and the cross-correlations of Korean stock returns associated with three other countries: Japan, USA, and China, using the Hamilton 2-regime Markov Switching model, for the period January 1993–December 2016. In both regimes, the volatility in the Korean stock market is greater than Japan and USA, but less than China. In regime 1 with low-volatility, the stock returns of both Korea and Japan are significantly affected first by their exchange rates and then by their interest rates. In regime 2 with high-volatility, the Korean stock market is explained by neither of the two exogenous variables while the Japanese stock returns respond positively to the exchange rates but negatively to the interest rates. The transition probability from regime 1 to regime 2 is greater than the reverse probability in the Korean stock market, which is opposite in Japan. Considering all four countries simultaneously, the Korean stock market is highly influenced by both the US and Japanese stock market in regime 1 with low-volatility, but only influenced by the Japanese stock market in regime 2 with high-volatility.

Keywords

Markov regime switching model Stock returns Exchange rates Interest rates 

Notes

Acknowledgements

This work was supported by the 2017 Hongik University Academic Research Support Fund.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflicts of interest.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.School of Business ManagementHongik UniversitySejongRepublic of Korea
  2. 2.Finance and Insurance, School of Business ManagementHongik UniversitySejongRepublic of Korea
  3. 3.College of Science and TechnologyHongik UniversitySejongRepublic of Korea

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