Abstract:

Abstract. The efficiency of the stock market is tested by linear and non-linear methods benefiting from variables such as exchange rate, interest rate, money supply, and commodity prices. This paper specifically focuses on the exchange rate variable for an oil producer country, Kuwait, and tries to estimate parameters using the Classical Linear Regression Model, Autoregressive Distributed Lag Model and Nonlinear Autoregressive Distributed Lag Model. According to nonlinear results, we explore that macroeconomic and financial variables are inextricably interwined with stock prices. In this respect, exchange rate substantial harbinger considering magnitude and asymmetry. The results put forward in this study indicate a cointegration relationship, a short-run and long-run asymmetry between exchange rate and stock prices. Although the linear model indicates that an appreciation of the local currency increases stock prices in the short-run, the nonlinear model reveals a drop in stock prices significantly in the long-run.        

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