The Dynamic Relationship Between Stock Index and Exchange Rate: Evidence for Tunis

Abstract

The analysis of time varying correlation between stock index and exchange rates in the context of international investments was been well researched in the literature in last few years. In this paper, we study the interdependence of stock index and exchange rate for the Tunis during the global financial crisis. Hence, we approve a DCC-FIAPARCH model to study the dynamic conditional correlation, throughout the period spanning from January 1, 2006 until January 1, 2017. The empirical results recommend asymmetric responses in correlations between the stock index and exchange rate from Tunisia. Moreover, the results indicate an increase of exchange rates and stock index correlations through the crisis periods, telling the different currencies vulnerability. Finally, we find some significant decreases in the estimated dynamic correlations, indicating the existence of a “currency contagion effect” during turmoil periods.

JEL classification numbers: G32, G33, C22, C53, G15.

Keywords: volatility, DCC-FIAPARCH, Global financial crisis, exchange rates, stock index and currency contagion.