Dependence between the stock market and foreign exchange markets in the Middle East: A GARCH-EVT-Copula approach

This thesis investigates the dependence structure between a stock market and the foreign exchange rate for four Middle East countries: Egypt, Iran, Israel and Turkey. Exchange rates are examined with respect to both the US Dollar and the Euro. We model dependence using Gaussian, Student’s t-, Clayton, Gumbel and Frank copulas, with AR-GJR-GARCH marginal models. We estimate the copulas with daily data spanning between 13 and 18 years up to 2017:9, depending on the series. Our major findings are (i) unanimous absence of lower tail dependence between every economy’s stock market and the home currency. This asymmetry provides attractive features for international investors. (ii) Small but significant upper tail dependence for the frontier market, Egypt, and the emerging market of Iran. The findings have useful implications for diversification and risk management purposes.