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This chapter examines the impact of price fluctuations in foreign stock markets on the stock prices of domestic banks in Korea, Malaysia, Singapore, and Thailand. Some studies have argued that the 2007–2009 global financial crisis (GFC) affected domestic banks less in East Asia, even though the supporting evidence is rather limited. Employing a multinomial logit model, we estimate how changes in the United States and Japanese stock markets affected the banking sectors in the sampled countries before the 1997 Asian financial crisis, and before and during the more recent GFC. We interpret the number of banks in a given country that experienced a large price shock on the same day (or “coexceedance”) as shocks to the domestic banking sector. The results suggest that fluctuations in foreign stock market indices exerted a larger impact on the prices of East Asian banking stocks during the 2000s than during the 1990s. In addition, although the shocks brought about by the deterioration of foreign stock markets were significant before the GFC, both increases and decreases in foreign stock prices significantly affected the banking sectors of the respective countries during the crisis. Lastly, we conclude that increasing foreign capital flows and foreign assets and liabilities greatly influenced domestic banking systems in East Asia during the 2000s.

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.

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.

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.

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.

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.

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.

Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.

Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.

Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.

Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.

Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.

Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.

The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial crises on the relation between foreign exchange and stock returns in the MENA region.

The authors examine the long-run relation between these two variables using VECM and the authors study the volatility behavior of these two variables using the Dynamic VECH–generalized autoregressive conditional heteroskedasticity (GARCH) model. The sample covers the MENA region over the period 2004–2015.

The results indicate a regime shift in three countries: Egypt, Tunisia and Morocco. In addition, the results assert asymmetric relation between stock returns and changes in exchange rates during pre-crisis and post-crisis periods. Modeling the volatility of the foreign exchange and stock return and their covariance using VECH–GARCH suggests that the persistence in volatility is more prominent in the crisis/post-crisis period as compared with the pre-crisis period. Finally, the authors also find more significant results for the persistence parameter in the covariance between stock return and foreign exchange in the crisis/post-crisis period as compared with the pre-crisis period.

To the best of the authors’ knowledge, the studies by Wong and Li (2010) and Caporale et al. (2014) are the only two that have examined the interaction between stock prices and foreign exchange during the recent financial crisis of 2008. To the authors’ knowledge, none of the previous literature examined the impact of financial 2008 crisis on the relation between foreign exchange and stock prices in the MENA.

The purpose of this study is to ascertain how foreign and domestic Exchange Traded Funds (ETFs) investing in Indian equities affect their return volatility and pricing efficiency. Further, we investigate how the difference in market timings affect the impact of ETFs on their constituents. Lastly, we examine how these effects vary during tranquil and turmoil periods in the ETF markets.

The study is based on quarterly data for stocks comprising the CNX Nifty 50 Index from 2009Q1 to 2019Q3. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters' Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.

Foreign ETFs from North America and the Asia Pacific largely have an adverse impact on stocks' return volatility. In times of turmoil, stocks with higher coverage of European, North American and Domestic funds are susceptible to volatility shocks emanating from these regions. European and Asia Pacific ETFs are associated with improved price discovery while North American funds impound a mean-reverting component in stock prices. However, in turbulent markets, both positive and negative impacts of ETFs on pricing efficiency coexist.

To the best of the authors' knowledge, this is the first study that examines the impact of domestic as well as foreign ETFs on the equities of an emerging market. Furthermore, the study is unique as we investigate how the effects of ETFs vary in turbulent and tranquil markets. Moreover, the paper examines the role of asynchronous market timings in determining the ETF impact. The paper adds to the growing literature on the unintended consequences of index-linked products.

There is no research on understanding the difference in the nature of volatility and what it entails for the underlying relationship between foreign institutional investors (FII) flows and stock market movements. The purpose of this paper is to explore how permanent and transitory shocks dominate the common movement between FII flows and the stock market returns. As emerging markets are a major destination of international portfolio investments, the author uses India as a perfect case study to this end.

The paper uses the permanent-transitory as well as a trend-cycle decomposition approach to gain further insights into the common movement between foreign institutional investors (FII) flows and the stock market.

When the author identifies innovations based on their degree of persistence, transitory shocks dominate stock returns, whereas permanent shocks explain movements in foreign institutional investors (FII) flows. Also, stock returns have a larger cyclical component compared to cycles in foreign flows. The authors find the sharp downward (upward) movement in the stock market (FII flows) cycle in the initial period of the COIVD-19 pandemic was quickly reversed and currently, the stock market (FII flows) is historically above (below) the long-term trend, hinting at a correction in months ahead. The authors find strikingly similar stock market cycles during the global financial crisis and COVID-19 period.

Evidence suggests the presence of long stock market cycles – substantial and persistent deviations of actual price from its fundamental (trend) value determined by the shared relationship with foreign flows. This refutes the efficient market hypothesis and makes a case favoring diversification gains from investing in India. Further, transitory shocks dominate the forecast error of stock market movements. Thus, the Indian market provides profit opportunities to foreign investors who use a momentum-based strategy. The author also finds support for the positive feedback trading strategy used by foreign investors.

There is a need for policymakers to account for the foreign undercurrents while formulating economic policies, given the findings that it is the permanent shocks that mostly explain movements in foreign institutional flows. Further, the author finds only stock markets error-correct in response to any short-term shocks to the shared long-term relationship, highlighting the disruptive (though transitory) role of FII flows.

Unlike existing studies, the author models the relationship between stock market returns and foreign institutional investors (FII) flows by distinguishing between the permanent and transitory movements in these two variables. Ignoring this distinction, as done in existing literature, can affect the soundness of the estimated parameter that captures the nexus between these two variables. In addition, while it may be common to find that stock market returns and FII flows move together, the paper further contributes by decomposing each variable into a trend and a cycle using this shared relationship. The paper also contributes to understanding the impact of COVID-19 on this relationship.

This paper aims to examine the volatility spillover dynamics between stock and foreign exchange market of China considering subprime 2007 financial crisis period.

This study considered daily data from January 2, 2002, to December 31, 2013. The sample period has been further divided into three periods; full sample period (January 2002-December 2013), pre-crisis period (January 2002-October 2007) and post-crisis period (October 2007-December 2013). This study opted Exponential Generalized Autoregressive Heteroskedasticity (EGARCH) model for the purpose of investigating asymmetric volatility spillover.

The results obtained using the EGARCH model imply that volatility spillover dynamics varies from period to period. In full sample period, the results show evidence of significant unidirectional volatility spillover from foreign exchange market to stock market. In pre-crisis period, the results indicate unidirectional volatility spillover from stock market to foreign exchange market. However, in post-crisis period, the results reveal significant bidirectional volatility spillover between stock and foreign exchange market.

The results of the study are important for policy makers because understanding the behavior of the financial markets, i.e. stock and foreign exchange market, would increase the success of policies implemented in a crisis situation. The results would help investors to formulate efficient portfolios.

This study is an important contribution to the existing literature in terms of analyzing volatility spillover between stock and foreign exchange market in an emerging economy, China. Furthermore, this study explored the volatility spillover dynamics between the two markets by considering the pre and post subprime Asian crisis period.

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and individual (retail) investors. The question of whether FIIs exhibit herding and positive feedback trading while investing in the Indian stock markets has not been examined so far. This study is an attempt to fill the gap and contribute to the existing evidence on foreign portfolio investment in India.

Methodology/approach – We have analyzed the daily data on purchases and sales of securities by FIIs sourced from the Securities and Exchange Board of India (SEBI), and the Bombay Stock Exchange (BSE). We have adopted the approach of Lakonishok et al. (1992), and Wermers (1999) to examine herding and positive feedback trading by foreign investors.

Findings – Our results suggest that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but not restricted to large cap stocks as they enjoy better liquidity.

Social implication – The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI), and the country's central bank (RBI) as it adversely affects stock prices and volatility. They are required to formulate and implement a suitable policy response given their objective of protecting the interests of small investors in the market. They may also have to monitor the purchases and sales of equities by FIIs in general and of better performing large cap stocks in particular.

The purpose of the present study is to directly examine the relationship between bilateral exchange rate and stock market index in a bivariate framework during the period of the floating exchange rate regime in Thailand.

The monthly data used in this study are the stock market index or stock prices from the Stock Exchange of Thailand, and the nominal bilateral exchange rate in terms of baht per US dollar from the Bank of Thailand. The period covers July 1997 to June 2010 with 156 observations. This is the period that the country switched from fixed to floating exchange rate regime. The stock market return is calculated by the percentage change of stock market index (or stock prices) while the exchange rate return is the percentage change of the nominal bilateral exchange rate. Three estimation methods are used to capture the interaction between stock and foreign exchange markets: bounds testing for cointegration, non‐causality test, and the two‐step approach with a bivariate GARCH model and Granger causality test.

The results of the present study show that bounds testing for cointegration does not detect the long‐run relationship between stock prices and exchange rate. In addition, the non‐causality test fails the diagnostic test for multivariate normality in the residuals of the estimated VAR model. However, the two‐step approach adequately detects the linkages between the stock and foreign exchange markets. It is found that there exists positive unidirectional causality running from stock market return to exchange rate return. The exchange rate risk causes stock return to fall as expected. Moreover, there are bidirectional causal relations between stock market risk and exchange rate risk, but in different directions.

Since a rising trend in the risk in the foreign exchange market causes stock return to fall, both domestic and foreign investors should be aware of the risk or uncertainty in the foreign exchange market because it can cause their portfolio return to fall. For policymakers, reducing exchange rate risk cannot be done without the associated costs from a rising risk in the stock market.

This study provides an evidence of volatility (or risk) spillovers in stock and foreign exchange markets. In addition, the risk in foreign exchange market that adversely affects return in the stock market is an expected phenomenon under the floating exchange rate regime.

The purpose of this paper is to analyze the nature of returns and volatility spillovers between exchange rates and stock price in the IBSA nations (India, Brazil, South Africa).

The study uses VAR framework and the recently proposed Spillover measure of Diebold and Yilmaz to examine the returns and volatility spillover between exchange rates and stock prices of IBSA nations. In addition, multivariate GARCH with time varying variance‐covariance BEKK model is used as a benchmark against the spillover methodology proposed by Diebold and Yilmaz.

The results of multivariate GARCH model suggests the integration between stock and foreign exchange markets and indicates the existence of bi‐directional volatility spillover between stock and foreign exchange markets in the IBSA countries. Spillover results using the Diebold Yilmaz model suggest the bi‐directional contribution between stock and foreign exchange market, in terms of both returns and volatility spillovers. Overall, results confirm the presence of returns and volatility spillovers within the IBSA nations and, in particular, the stock markets play a relatively more important role than foreign exchange markets in the first and second moment interactions and spillovers.

The market participants may consider the relationship between the exchange rate and stock index to predict the future movement of each other effectively. Multinational companies interested in exchange rate forecasting may consider the stock market as an important attribute. There is an interesting implication for portfolio managers too because of the spillover stock and foreign exchange markets. This knowledge would help to create a fund which performs well. Moreover, the paper can help regulators and policy makers in IBSA nations to understand the structure of the market in a better way and then design their policies.

The study contributes to the literature by extending the existing studies on the spillover between stock price and exchange rate by investigating the issue for three emerging economies, India, Brazil and South Africa. Unlike most studies in the literature which focus on multivariate GARCH model, this is the first study which explores the issue of returns and volatility spillover between the stock prices and the exchange rates using spillover measure of Diebold and Yilmaz and much longer and recent daily data. Moreover, multivariate GARCH with time varying variance‐covariance BEKK model is used as a benchmark against the spillover methodology proposed by Diebold and Yilmaz.