Özet:

The main aim behind this research is to find out the exchange rate risk on stock price indices return volatility of 22 emerging countries. The study is based on the monthly stock index and foreign exchange rate in relation the USD of the related 22 countries’ data between January 2000 and December 2016. Both fixed effect and random effect models were tested. The fixed effect model assumes that stocks are correlated with country specific exchange rates while the random effect model assumes residuals are uncorrelated with the country specific exchange rates. Furthermore, country specific variance on stock index return was tested using the Breusch and Pagan LR test, and it was found that there is no country specific volatility, which means that their variance is zero. This means that there are not any country specific effects in the model, which can be interpreted to mean that there is no medium or long-term arbitrage possibilities with international transactions.  Finally, it was observed that exchange rate changes had a negative impact on stock index returns. The previous month’s stock market movement or random term did not have any impact on the current market returns according to AR and MA terms. Moreover, international foreign exchange market and stock market cooperate consistently, uncausing any arbitrage possibility on monthly basis. Daily models might detect short-term arbitrage failures in international transactions. Furthermore, there are asymmetric GARCH models to test the gain and loss volatility on transactions.

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