Abstract
In this study, we examine the correlation between stock returns of Export-oriented (EOIs) and Import-oriented (IOIs) industries and exchange rates, to derive stock-exchange optimal weights, attempting to manage the risk of investors in the capital market. To do so, the ADCC and DCC models are used. The data consists of the stock return of the listed industries, and the daily exchange rate from 2008 to 2020. The results suggest that EOIs have a dynamic asymmetric conditional correlation, and IOIs have a dynamic symmetric conditional correlation with the exchange rate. Moreover, the results indicate that in both currency crises, the weight of optimal portfolio in all industries except pharmaceuticals, in non-crisis period is over 50% and in the crisis period is less than 50%. Accordingly, and to reduce the risk of the portfolio, in the non-crisis period, investors should invest more than half of a one-Rial portfolio to dollar exchange, and in the crisis period, they should allocate less than half of a one-Rial portfolio to this currency. In case of the currency crisis, it is suggested that investors invest in the stock of basic metals, because this industry is a pioneer in attracting currency crisis and increasing stock value of the industry through future cash flow and replacement value, and reduce the stock of pharmaceuticals and computers in their portfolio, due to attracting negative effects of the exchange market.
Highlights
The complexity of financial markets and their interconnections make a loss in a sector or a country spread rapidly to other sectors of the economy of other countries
As the scope of this study covers the correlational structure of exchange rate and the different listed industries to provide a stock-exchange portfolio with regard to the currency crisis, it is critical to pay attention to the simultaneous fluctuations between both markets
Among these industries, pharmaceutical has the lowest value of weighted mean in the optimal portfolio during a currency crisis
Summary
The complexity of financial markets and their interconnections make a loss in a sector or a country spread rapidly to other sectors of the economy of other countries. Securities and exchange markets have ever been the sensitive parts of financial markets These two markets rapidly absorb fluctuations in commercial cycles of the economy and reflect the economic changes. As a result of the recessions in economic activities and high inflation, stock market or foreign exchange market as alternatives for investments were ahead of investors who had hot money in their hands. In such turmoil in the mentioned asset markets, the questions are: had the exchange rate fluctuations strong asymmetric correlations with the stock price of export and import-oriented industries over the time? This paper is organized into five sections: introduction, literature review, methodology, findings, and conclusion and remarks
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