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Stock market performance and foreign exchange market in Egypt: does 25th January revolution matter?

Ahmed A. El-Masry (Centre for Financial and Corporate Integrity, Coventry University, Coventry, UK) (Faculty of Commerce, Mansoura University, Mansoura, Egypt)
Osama M. Badr (Faculty of Commerce, Tanta University, Tanta, Egypt)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 11 June 2020

Issue publication date: 22 July 2021

Abstract

Purpose

This paper examines the causal relationship between stock market performance and foreign exchange market in Egypt over the period 2009–2016. The study period is divided into two sub-periods: pre- and post-January 25th Egyptian revolution (ER). The reason is to examine how this revolution affects the causal relationship between the two markets' performance.

Design/methodology/approach

In this study, the daily basis data are used to enable good and effective observation changes in the foreign exchange rate and stock market performance over time. Stock market indexes and stock market capitalization are used as proxies for stock market performance. Further, the Egyptian pound to US$ exchange rate is used as a measure for foreign exchange market performance. The study analysis is done in stages. The first is to check the variables' stationarity for the pre- and post-revaluation. The second is to examine the cointegration among the variables. The third is to run vector autoregression (VAR) estimates, after which VAR Granger causality tests are employed.

Findings

The results show that the data are not stationary at their levels but stationary in their first difference level while there is no cointegration in the long-run among the variables in both sub-periods. Further, findings indicate that, in the pre-January 25th revolution period, there is a significant causal relationship between the foreign exchange market and stock market indexes and a significant causal relationship between market capitalization (CAP) and exchange rate at the 1% level. However, in the post-January 25th revolution period, the study does not find a significant causal relationship between foreign exchange market and stock market indexes and capitalization.

Research limitations/implications

As this study focuses on the causal relationship between foreign exchange and stock markets before and after the 25th January Revolution, other macroeconomic variables such as consumer price index, interest rate and GDP were excluded for the comparison purposes with other studies. Further research is suggested to include them in the analysis to find out its effect on the performance of stock market and foreign exchange market.

Practical implications

The existence of long-run bidirectional causality means that portfolio managers and hedgers may have improved their understanding regarding the dynamic relationship between foreign exchange market and stock market performance as this may help them to plan and implement suitable hedging strategies to guard against currency risk in future crises or events. Investors, fund and portfolio managers and policymakers should give much attention to these event-specific interactions when they make capital budgeting decisions and implement regulation policies. Furthermore, our results may allow portfolio managers, investors and policymakers to assess the importance of informational efficiency for both markets.

Originality/value

This paper is an original contribution to the literature that concerns the causal relationship between stock market and foreign exchange market in the period of political instability and social unrest such as the January 25th Revolution in one of the emerging markets, namely Egypt.

Keywords

Acknowledgements

The authors thank the Editor, Area Editor and three reviewers for valuable comments that significantly improve the paper.

Citation

El-Masry, A.A. and Badr, O.M. (2021), "Stock market performance and foreign exchange market in Egypt: does 25th January revolution matter?", International Journal of Emerging Markets, Vol. 16 No. 6, pp. 1048-1076. https://doi.org/10.1108/IJOEM-11-2017-0477

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited