Emerging Stock Markets’ Performance in Presence of Pandemics and Exchange Rate Policy Regime: An Empirical Clarification

Abstract

The objectives are to analyze the impact of exchange rate policy regime shifts, number of infections/deaths from HIV/AIDS and covid-19 diseases on returns and prices of emerging stock markets. The Markov switching model was estimated while the quantile regression method was used for robustness checks to further verify the credibility of results. According to the findings of the study, developing nations will most likely remain in a period of high volatility for 32 years and 3 months before moving to lower volatility regimes. The same group of nations will maintain a low stock-price regime for approximately 12 years before shifting to a highly volatile regime. Exchange rate regimes had a significant impact on stock returns. HIV infections are inversely related to returns without significance and covid-19 deaths had significant impact on the returns of emerging markets. So, the health crisis manifesting in form of covid-19 disease outbreak significantly destabilized stock market indices confirming the lack of resilience of emerging markets. Exchange rate regime shifts were not significant in predicting stock prices of developing countries covered by the study. Hence, market participants and investors in emerging nations do not see changes in exchange rate regimes as important factors influencing stocks, which might be owing to investor confidence. The research further discovered that, in developing nations experiencing periods of increased volatility, a proportion adjustment in the currency-defining rate regime’s pattern results in a matching adjustment in stock returns by 0.62 percent while it changes by 0.05 percent with minimal market swings. The research findings are relevant to the decisions of market investors for the purpose of advancing a course for a holistic approach to stock markets’ diagnosis, and risk assessment in a globalized world.