Asymmetric impact of exchange rate changes on stock returns: evidence of two de facto regimes

What is it about?

Throughout its recent economic history, Egypt has experimented with a range of exchange rate regimes, with a view to establishing macroeconomic stability and promoting sustainable growth. The present study investigates how the dynamic behavior of exchange rates under two different de facto regimes affect domestic stock prices, using Egypt as a case study. The empirical analysis is carried out in the context of the nonlinear autoregressive distributed lag (NARDL) modeling framework, after accounting for structural breaks and a range of relevant determinants of stock prices. The results suggest that, during the soft peg regime period, both positive and negative changes in EGP/USD rates have significant effects on stock returns, with varying degrees of intensity, whether in the short or long run. During the free float regime period, short-term asymmetries fade away, while long-term asymmetries continue to exist. In either regime, currency depreciation tends to exercise a stronger influence than does currency appreciation. Overall, the findings of this study offer practical implications for investors and policy makers.

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