The asymmetric impact of interest and exchange rate on the stock market index: evidence from MENA region

Abstract

Purpose

Several theoretical and empirical studies have shown the significant effects of economic and environmental factors on a large number of financial indicators. In this paper the authors are going to study whether the main stock market index, is impacted by the variations of the exchange rate and the interest rates.

Design/methodology/approach

This paper studies the response of the index market return to fluctuations in the interest rate and the exchange rate in five countries from the MENA region (Tunisia, Morocco, Egypt, Turkey and Jordan). To investigate whether this impact exists, the authors used the non-linear autoregressive distributed lag (NARDL) model with daily data from June 1998 to June 2018.

Findings

The application of the non-linear ARDL model confirms the presence of cointegration between return index, interest rate and exchange rate. The results show that the asymmetry hypothesis is only valid for the short run which suggests that the market index is sensitive to the variation in the interest rate and exchange rate. This means that these macroeconomic factors play an important role in the MENA region stock markets.

Originality/value

The findings confirm that the index returns in the MENA region stock markets are related to macroeconomic fundamentals such as the exchange rate and the real interest rate. The reaction of some indices is sensitive to whether the shocks are positive or negative. This finding may help investors to choose their strategies starting from these changes. Accordingly, policy makers must pay attention to the development progress of stock market.

Citation

Moussa, F. and Delhoumi, E. (2022), "The asymmetric impact of interest and exchange rate on the stock market index: evidence from MENA region", International Journal of Emerging Markets, Vol. 17 No. 10, pp. 2510-2528. https://doi.org/10.1108/IJOEM-01-2020-0089