Threshold of financial development and currency devaluation that stimulates stock market returns
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David Umoru 
, Evaristus Akpanke Ushie , Christopher Awa Otu, Abanbeshie Jeremiah , Rebecca Oliver Enuoh, Anake Fidelis Atseye, Francis Abul Uyang , Anthony Ogar , Atelhe George Atelhe, Malachy Ashywel Ugbaka , Stephanie Ewa Onyebuchi
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abstract
In this study, we endeavored to establish a threshold of financial sector development (FSD) and exchange rate devaluation (EXD) that stimulates stock market returns (SR) based on an analysis of 25 stock exchanges in the Middle East and North Africa (MENA) region. Threshold generalized autoregressive conditional heteroskedasticity (GARCH) regressions were estimated. Only the Istanbul Gold Exchange stock return was found fit for GARCH volatility analysis. However, results from threshold regression revealed that EXD does have significant threshold effects on SR and when EXD falls lower than its threshold of 19.69 percent, FSD had an increased influence on SR by 11.8 percent. The effects of EXD and FSD on SR are greater when the FSD level is beyond the threshold value of 23.45 percent. FSD below thresholds of 23.5 percent, and 51.1 percent would be insignificant in predicting SR. Lagged SR within an economy below the FSD threshold of 50.59 percent will negatively affect SR. By and large, our results reveal that FSD cannot influence returns of stock on their exchange floors given the devaluation of local currencies beyond the threshold value of 19.69 percent. Future studies could extend our threshold regression framework to allow for endogenous threshold variables.
Keywords: Threshold Effects, Financial Development, Exchange Rate Devaluation, MENA Region, Stock Market Returns, GARCH Volatility
Authors’ individual contribution: Conceptualization — D.U.; Methodology — D.U., M.A.U., A.G.A., and A.O.; Software — D.U., M.A.U., F.A.U., A.F.A., and R.O.E.; Validation — R.O.E. and A.J.; Formal Analysis — D.U., A.O., F.A.U., and A.F.A.; Investigation — D.U., C.A.O., E.A.U., and S.E.O.; Data Curation — D.U., A.J., and C.A.O.; Writing — D.U., E.A.U., and S.E.O.; Supervision — D.U., M.A.U., and A.G.A.
Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
JEL Classification: C32, G24, D50
Received: 12.01.2023
Accepted: 30.01.2024
Published online: 02.02.2024
How to cite this paper: Umoru, D., Ugbaka, M. A., Atelhe, A. G., Ogar, A., Uyang, F. A., Atseye, A. F., Enuoh, R. O., Jeremiah, A., Otu, C. A., Ushie, E. A., & Onyebuchi, S. E. (2024). Threshold of financial development and currency devaluation that stimulates stock market returns. Corporate Governance and Organizational Behavior Review, 8(1), 126–143. https://doi.org/10.22495/cgobrv8i1p11
