Currency Volatility Risk, VIX and Equity Market Performance of Developed Countries: Quantile and Markov Regressions Analysis
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Abstract
The susceptibility of financial markets to macroeconomic variables and other risk factors globally raises the need for this research. The focus of the study is to analyze the impact of exchange rate policy regime shifts and the outbreak of pandemics on stock market returns and prices in developed countries. The study used the Markov switching model. Quantile regressions were also estimated to substantiate the credibility of the results. The study found that exchange rate risk caused significant reductions in stock values. Since the VIX index served as the switching predictor variable, the results suggest that in the state of falling expectations as regard market uncertainty, there was a corresponding upward adjustment in stock market prices, while rising market expectations of volatility and uncertainty, stock prices jumped up. These portray downward adjustments in the prices of equities and consequently return whenever there is a percentage rise in the interaction index. Stressful market circumstances made evident in market sentiments, embrace algorithmic trading and high-frequency traders, magnify price swings and exacerbate instantaneous market reactions to news or events regardless of the regime. This amplifies uncertainty about the market and significantly discourages stock returns. Volatility lowers business performance, weakens investors' market engagements, and lowers firm share returns. Accordingly, the findings support earlier research that a rise in VIX heightens investors' anxiety over the significant suspense of volatile stock market price swings and declining returns. The research outcomes are significant for use by market traders, investors and policy makers. Investors should use volatility risk projections to inform their investment choices, such as options or volatility-based trading. Financial regulation may be required to monitor and control excessive volatility, since extended periods of volatility destabilizes financial markets and damage investor trust.
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