Markov-switching causality test of stock returns and exchange rate changes for six OECD countries during the US financial crisis

Abstract

This paper investigates the Regime-switching causality between stock returns and exchange rate changes for six OECD countries during the US financial crisis. Using a Markov-switching VAR model, we find changing patterns of causality and show that the lead of exchange rate changes over stock return changes is noticeable in a high-variance regime as compared to low-variance regime. However, UK does not show any causal relationship during this period.