The Effect of Inflation and Currency Exchange Rate on the

Stock Market in Egypt

Prepared to
Dr. Wael Shams-Elden

Prepared By:

Hazem Hussam Bahgat

Mahmoud Ahmed Hassaan
Mohamed Ahmed Hamed
Yousef Mohamed Taher
 ABSTRACT

The research purpose is to investigate and find out the effect of changes in the exchange rate and the
rate of inflation on the overall performance of the stock market in Egypt until the year 2020, during
which the research relied on the self-regression model distributed with slow-down periods, in addition
to the model generalized self-regression conditional on error term variance instability. And depending
on monthly data for the research variables in the period 2000 to 2020, after making a static tests for
the time series of study variables in depending on the test results which has showed a difference in the
degree of the stability of the time-series , The results of the estimates output with that there is a long-
term equilibrium relationship which moves from the exchange rate and the inflation rate at the
Egyptian Stock Market Performance Index (EGX30), as well as the indicator of the estimated for each
of parameters is positive, which is reflecting the direct effect of the exchange rate with the inflation
rate on that indicator.
The results of the random error limit variation instability test showed the typicality of the fluctuations
of the returns of the Egyptian market, and the estimates of the GARCH M model 1.1) confirmed that
from the significant defect of both the ARCH effect and the GARCH effect, reflecting the failure of the
movement hypothesis. Stochastic as a measure of market efficiency, the average equation also clarified
the significance of the positive impact of the changes in the exchange rate, the inflation rate, and the
degree of risk to which the Egyptian stocks are exposed to fluctuations in the returns of this market.

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 TABLE OF CONTENTS

ABSTRACT.........................................................................................................................ii
Table of Contents.................................................................................................................ii
List of Figures......................................................................................................................ii
List of Tables.......................................................................................................................ii
LIST OF ABBREVIATIONS /ACRONYMS.....................................................................ii
1. INTRODUCTION......................................................................................................1
1.1 History of financial market in Egypt........................................................................1
1.2 Importance of financial market in Egypt............................................................2
1.3 Research questions..............................................................................................5
2. LITERATURE REVIEW.............................................................................……...7
2.1.................................................................................................................. The previous
studies .....................................................................................................7
2.2..................................................................................................................The most important
features of the Egyptian stock market performance index and the changes in the exchange
rate and the inflation rate.........................................................................14
3. The research methodology :............................................................................................. 16
3.1 Model selection................................................................................................16
3.2 Theoretical framework :....................................................................... 16
3.3 Models variable description :............................................................... 16
3.3.1 The performance index of the Egyptian stock market (EGX30)......... 16
3.3.2 The Nominal exchange rate for the EGP .......................................... 17
3.3.3 Inflation................................................................................................ 18
3.4 Developing the Hypothesis.................................................................................19
3.5 Research design ..................................................................................................19
3.5.1 Stability and determining the degree of integrity of the time series of the study
variables.......................................................................................................20
3.5.2 Estimating the long-term relationship between the exchange rate and the inflation

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 rate............................................................................................................... 20
3.5.3 Error Correction Model...............................................................................21
3.5.4 Generalized Autoregressive Conditional Heteroscedasticity......................21
4. DATA ANALYSIS..................................................................................................24
4.1 The tests for the stability of the time series of the study variables.......................24
4.2 Boundary Test Results : Common Integration Entrance.....................................25
4.3 Results of error correction factor estimation.......................................................26
4.4 Results of long-term evaluation of generalizations.............................................26
4.5 Results of the “ARCH Test”: The presence of this problem .............................28
4.6 Results of the model estimation (ARDL, GARCH M) ......................................29

5. CONCLUSION AND RECOMMENDATION .....................................................33

REFERENCES ............................................................................................................36

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 LIST OF FIGURES

Figure 01, Market capitalization and number of companies listed....................................02

Figure 2 Bonds activity vs Stocks activity.........................................................................03

Figure 3 Annual headline inflation breakdown.................................................................06

Figure 4 Relation between exchange rate and the customer price inflation....................15

Figure 5 Theoretical framework - Dependent and independent variables.........................16

Figure 6 Inflation during last two quarters of the year 2020 – Source CBE.....................34

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 LIST OF TABLES

Table 1 Results of the tests for the stability of the time series of the study variables.....24
Table 2 Results of estimates of the “ARDL (1, 1, 1) and Bounds Test” model................25
Table 3 ARCH test results for residual anisotropy............................................................29
Table 4 Results of estimates of the “ARDL, GAR” model.............................................30

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 LIST OF ABBREVIATIONS /ACRONYMS

ASEM Asia-Europe Meeting

CBE Central Bank of Egypt

EGX30  A stock market index for securities in Egypt

ARDL Autoregressive Distributed Lag

ECM Error correction model

ADF Augmented Dickey–Fuller test 

PP Phillips–Perron test

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 CHAPTER 1
INTRODUCTION

1.1 History of financial market in Egypt.

Considered among the oldest markets in the region, Egypt's capital market is a true image of the
Egyptian economy with its changes and developments.

The capital market is seen as a source of funds that companies need to finance their production and
services activities. As such, it represents a basic pillar for the growth of the economic process. Through
this market, individuals and financial institutions invest their money with the purpose of obtaining
medium- and long term returns. In return, companies and governments strive to re-invest such funds in
new production and service projects and expansions.

As a result, capital is allocated more efficiently and effectively to projects which provide more job
opportunities, contribute to the increase of economic growth rates and raise the living standards of the
public.

The securities market in Egypt dates back to the 19th century, in 1883 to be exact, when Alexandria
Exchange was established, followed by Cairo Exchange in 1903, which is currently called the Egyptian
Exchange.

The number of listed companies in 1907 was 228 with a market capital of about 91 million Egyptian
pounds. We cannot forget that the Egyptian Exchange was considered the fifth most active exchange in
the world during the 40th of the 20th Century. As a result of the nationalization of a number of
Egyptian companies during the 60th of that century, it went into a slowdown phase until the
government started to apply a comprehensive program for economic reforms and privatization. In
1992, the Capital Market Law was issued, which, together with the subsequent regulations and
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decisions opened the door again for revitalization of the Egyptian Exchange.

Year after year, new activities and several institutions working in different fields in the capital
market were introduced until the Egyptian capital market became among the strongest and deepest
activities of the market in the region, with the most complete setting of legislative, institutional and
technological structure, and the highest rate of compliance with international principles and
standards governing capital markets. The number of activities and mechanisms organized by
different legislations on the capital market is more than 16 different activities in 2010. By the end of
2010, there were more than 618 securities companies.

Figure 01, Market capitalization and number of companies listed

1.2 Importance of financial market in Egypt

Financial markets are one of the main pillars in contemporary economies, and this is due to its main
role in transferring savings from surplus units that possess financial resources but do not have the
investment opportunity to exploit them, to deficit units that do not have sources to finance their
investment opportunities, whether Through the primary money market in the form of real investments
that are directed to new projects or used for expansion in existing projects, or through the secondary
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money market and its role in providing the necessary liquidity to finance those investments through the
re-circulation of the issued shares.
In addition, its role in reducing transaction costs and reducing the problem of asymmetry of
information between the parties to the deal and the problems that may result from the wrong choice
and moral risk, in a way that contributes to raising the efficiency of utilizing available resources and
increasing the rate of economic growth.
Egypt is considered one of the emerging economies that has a regular money market contributes in its
primary and secondary markets to the transfer of savings, and as a result of the development in this
market and with the use of modern technologies, the Egyptian stock market was able to provide an
attractive investment climate for both national and foreign investors, which was reflected in the
remarkable increase in the value of transactions in it, as the value of financial securities (stocks and
bonds) reached about 162 billion EGP issued in the first market at the end of 2019, foreigners acquired
about 33% of it, and Egyptian investors accounted for about 67%, including issuing new shares
amounting to nearly 140 billion EGP and 22.5 billion EGP for bonds, this for transactions amount of
120 & 162 billion EGP at the end of 2017-2018 respectively with an average annual growth rate of
105% for the period from year 2000 to 2019.

Figure 02, Bonds activity vs Stocks activity.

It has been also recorded a remarkable growth in the turnover of secondary market to reach 410 billion
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EGP at the end of year 2019 compared to 333 & 359 billion EGP during years 2017&2018 respectively
(the Financial Regulatory Authority – Egypt 2019).

The Egyptian stock market has recorded fluctuations that are reflected in the performance of its
indices. The Egyptian Stock Exchange (EGX30) index recorded an increase to 13,962 points in
December 2019 compared with 13036 points in 2018, while in 2017 it recorded by 15019 points, and
that was following the year at which the decision of national currency floating by the Central Bank of
Egypt in November 2016. It had previously been subjected to several waves of extreme fluctuations,
and that was after the global financial crisis in 2008, as in 2008 this index recorded a remarkable
decline to reach 4596 points after it reached 10550 points in 2007, and then recorded a relative
increase, reaching 7122 points in 2010. Then, it decreased after the January 2011 Revolution,
recording 3,622 points at the end of that year (Central Agency for Public Mobilization and statistics -
CAPMAS).
Stocks are considered as one of most components of wealth that are affected by the market conditions
which reflected in the historical information on the performance indicators of that market, as well as
economic changes, whether local or international. The results of studies indicated that between 30-35%
of changes in the stock price index can be attributed to economic factors Whether local or international
, especially those that reflect economic stability, including the rate of inflation and changes in the
exchange rate.
Hence the importance of the current study in testing the long-term relationship between two main
indicators of the Economic stability: the inflation rate and the exchange rate on the one hand, and the
performance indicators of the Egyptian Stock Exchange from the other hand, by using one of its main
indicators represented in the (EGX30) index, depending on the models self-regression with distributed
time gaps using the boundary test.

On other hand, if the economic variables affect the performance indicators of the stock markets, then
the information plays an important role in determining the efficiency of market ownership and its
mechanisms. Whereas the main characteristic of the efficient market is the availability of information

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to all that affects the market value of a share, and this market value is the real value that generates a
return that is sufficient to compensate the investor for all risks that are involved in the investment.
Hence, the importance of the current study in determining the efficiency the Egyptian stocks market,
by measuring the impact of historical information and the change in both the general level of prices the
exchange rate is based on fluctuations in the returns of the Egyptian stock market using generalized
self-regression models conditional error term variance instability.

In light of the environment working for the investment decision-makers related to uncertainty, and the
degree of risk involved in that, the importance of the current study is in measuring the impact of risk
on performance indicator shifts that are exposed to most of the financial papers, whether for political or
Economically linked to the inside, such as the events of the January Revolution 2011 and the decision
to float the EGP currency in November 2016, or as a result of external factors such as the events of
September 2001, the Iraq war in 2003 and the global financial crisis in 2008.

1.3 Research questions,

1- Is there a long term relationship between the independent variables such as rate of exchange and
inflation rates and the dependent variables such as the index of the Egyptian market performance?
2- Is there an impact of the historical information about fluctuations in the returns of the Egyptian
stock market and changes in each level?, The general price and the exchange rate depends on the
fluctuations of their current returns, and hence their efficiency?
3- Does the risk that the Egyptian economy is exposed to due to internal or external causes have an
impact on the fluctuations in the stock market in Egypt and its returns trends?

Based on the study problem with its three questions, the objectives of the current study are to
investigate the impact of two basic economic stability variables, namely the exchange rate and the
inflation rate on the performance of the Egyptian stock market,

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Estimating the long-term relationship between them, as well as testing the efficiency of this market by
examining the extent of its impact
Historical data on current yield valuations and trends. Using monthly data for the period between
January 2000 and February 2020.

Within the framework of the study problem and the answer to its three questions and in order to
achieve its objectives, the study is divided into five main sections, the first part of which deals with
presenting a number of previous studies and what the current study can contribute in the light of these
studies, and the study in its second section presents the features of the stock market performance index
In its third section, it deals with the methodology of the study by presenting its variables, data sources,
and the standard loading methods used. In its fourth section, the results of the standard loading are
presented and in its fifth and final section are presented the summary and recommendations.

Figure 03, Annual headline inflation breakdown.

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 CHAPTER 2
LITERATURE REVIEW

2.1 The previous studies

There are many studies that dealt with downloading and measuring the determinants of financial
market returns and the extent of their efficiency in a number of economies, including Egypt. What is
left is a number of those previous studies according to their chronology. Some of them were on the
developed financial markets, due to the convergence between these markets and the Egyptian financial
market, and thus the possibility of benefiting from them in the current study when formulating the
model, determining the methodology and setting up pre-expectations about trends of influence
between the economic variables used, as follows:

In a study (Manasseh et al., 2019) on the Nigerian money market, during which the relationship
between stock prices and the exchange rate was examined based on the “VAR-GARCH” model and
using monthly data in
The period between January 2000 and October 2014, a long-term equilibrium relationship was found
between the exchange rate and stock prices according to the Johannesburg Joint Integration test, and
the results of the estimate showed a statistically significant relationship moving from the stock market
to the exchange market. The inconsistency of the variance based on the “ARCH” test and through the
variance equation reveals the existence of a two-way relationship between fluctuations in both the
exchange rate and stock prices, reflecting the importance of previous changes in the ASEM market on
future fluctuations in the exchange rate and vice versa, and therefore the need to take this into account
when making a decision In the components of the EUR portfolio, especially for foreign investors, it is
a hedge against the risks of exchange rate adjustments:

Those results differed with what was previously presented by (Sani & Hassan 2018) in their study on
the interaction between the exchange rate and the main index of stock market performance (ASI) in
Nigeria based on the “ARDL” model and the causation test with the introduction of a number of
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explanatory variables, in addition to the exchange rate. , Represented in the money supply and the rate
of economic growth, and using annual data for the period from 1985 to 2015, the results of the
estimate came to show the existence of a one-way causal relationship from the exchange rate to the
stock market, while this relationship moves from the stock market to the money supply with a two-
way causal relationship. Between economic growth and the mark of Stocks, and the results of the
“ARDL” model estimation confirmed the existence of a long-term positive relationship between the
exchange rate and the stock market performance index, as well as the rate of economic growth, while
the money supply had a negative impact on the stock market performance index. This reflects the
importance of the role of monetary policy by controlling the growth of the money supply as well as
achieving stability in the exchange rate to stabilize the stock market and reduce the risks of
fluctuations in it.

In the context of studying the effect of exchange rate fluctuations on the stock market return by
applying to both Tunisia and Turkey between January 2002 and January 2017, the study - Mechri et
al., 2019) adopted the GARCH model (1.1), and concluded that there is a statistically significant
effect. The previous fluctuations in the stock market in Turkey and their absence in the Tunisian
market, and these fluctuations take a specific form, which is that the large fluctuations in previous
periods are followed by large fluctuations, while the previous small fluctuations are usually followed
by small fluctuations. It also showed the importance of the impact of previous information on stock
market returns in determining its current trends based on the results of estimates of the impact of
ARCH & GARCH on the variance equation.

Regarding the role of quantitative economic variables in the growth of the stock market in South
Africa, Yuho (2001) relied on the "ARDL-Bound Test" model, using annual data for the period
between 1975 and 2015 to estimate the impact of each of the economic growth, the growth of the
banking sector, the inflation rate, the interest rate and the degree of economic openness. On the growth
of the capital market in South Africa, the study concluded that both the economic growth and the
development of the banking sector stimulate the growth of that market, while both the interest rate and
the inflation rate adversely affect the growth of the stock market. From the quantitative and sectoral

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stock market indicators for ten of the qualitative sectors and daily data for the period between January
9, 2008 and September 5, 2018 (Bagh (2019) studied the relationship between changes in the
exchange rate and stock prices, and based on the causality test of Granger and GARCH models, the
results of the study proved stability These data are in the level, despite the special nature that governs
most of the economic and financial variables that make them characterized by instability in the level,
as well as the results of the ARCH test for stability. The variance is indicative of the absence of the
error limit variance instability problem, the existence of which is the main reason for using GARCH
models to study stock price fluctuations resulting from the instability of the random error limit
variance. The results of the causality test showed that there is no causal relationship moving from the
exchange rate to the Egyptian stock market indices, whether EGX30 or EGX100, as well as to most of
the qualitative sectors indicators except for the telecommunications sector, the industrial products
sector, cars and the household and personal products sector. The returns of the main indicators of the
Egyptian stock market.
And about the relationship between the general index of stock prices on the Amman Stock Exchange
and a number of variables
Quantitative economic included money supply, inflation rate and industrial production index (2018,
based on the joint integration methodology and the causation test of Granger, and using monthly data
for the period between January 2000 and October 2016) to estimate this relationship, and reached the
existence of a long-term equilibrium relationship between the stock market index and the money
supply, While this relationship between the inflation rate and the stock market index, as well as the
industrial production index, did not appear. He also concluded that there is a one-way causal
relationship from the stock market performance index to those quantitative economic variables in the
short term.
In the study (Haughton & Iglesias, 2017) on the relationship between exchange rate changes and stock
price fluctuations in six countries of the Caribbean and Latin America, using monthly data for the
period between 2002 and 2012 and unit root tests for both Zivot & Andrews (1992) and Clemente et
al., (1998) to reveal the periods of structural changes, as well as to test the stability of the time series
for both the exchange rate and stock prices, and based on the ARDL model to test the existence of a
long-term relationship between the two variables, the results of the estimation proved the existence of

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a statistically significant effect of the exchange rate on stock prices in countries The study, and after
the ARCH test procedures to ensure that the variance was not fixed, took into account the effect of
fluctuations in stock prices and exchange rate changes in the model based on (ARDL - GARCH (1.1))
models, as the statistical significance of the estimated parameters in the countries of the study
improved and the explanatory strength increased For the model.
In examining the effect of exchange rate fluctuations on the index of stock prices in the Pakistani stock
market, the study (Bagh et al., 2017) relied on the regular least squares method to estimate the
regression equation, after making sure of the stability of the time segment of the period (January 2003,
December 2015) for both the exchange rate - as an interpretative variable and the index number of the
asset price as the dependent variable. And depending on the logarithmic formula and the use of the
rate of change in each of the two variables, the results of the estimation confirmed the positive effect
of the exchange rate fluctuations on the stock performance index. The results concealed with the
aforementioned and stigmatized the study (Mustafa & Nashat, 2008). The study aimed to examine the
relationship between the exchange rate and the share price in the Pakistani capital market with the
introduction of a number of explanatory variables, namely the money supply. And the interest rate and
gold prices, using the monthly data for the period (July 1981 and June 2004) and the integration
methodology -Combined with Guaansen, the ECM, and the Ganger causation test. The causality test
revealed the existence of a one-way reversal box in the short term from the asset price to the exchange
rate, while the existence of an equilibrium fund was not proven in the long term, with the significance
of the effect of monetary policy through the interest rate and money supply as any determinants of the
asset prices in the first markets. The financial leverage of Pakistan during the period under study,
which reflects the importance of monetary policy in achieving the stability of the capital market in
Pakistan.
In the study (Kennedy & Nourizad, 2016) on the effect of fluctuations in the exchange rate of the US
dollar against the euro on market fluctuations in the United States of America based on the GARCH
model (1.1) and weekly data for the period (January 1999 and January 2010) and using the market
performance index. The financial (S & P500) and the exchange rate of the dollar against the euro and
the introduction of a number of other explanatory variables that reflect the role of events and
information preceding the events of the market that were important in the period under study the

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events of September 2001 and the global financial crisis in 2008 in addition to the growth of supply
The result of the estimates came to confirm the importance of the previous information's role in
influencing the market’s returns, as well as the events that the economy may be exposed to and have a
role in the increase of financial market fluctuations, while the growth rate in supply had not changed.
Monetary influence on these fluctuations, and finally, the study emphasized the significance of the
mutually beneficial effect of exchange rate fluctuations on capital returns fluctuations, which made
researchers confirm the importance of monetary policy makers, when setting up an exchange rate
system. Orbit, in a way that preserves the stability of US financial dollars.
The study (Jebran & Iqbal, 2016) dealt with estimating the dynamic relationship between the ASEM
and the foreign exchange market in six Asian countries that took place in: Pakistan, India, Sri Lanka,
China, Hong Kong and Japan last, using daily data from January 8, 2012, January 2013 “and based on
EGARCH models that take into account the impact of asymmetric shocks that each of the financial
markets and foreign exchange markets are exposed to. The results of the estimation came to confirm
the presence of a two-way significant impact box between the foreign exchange and ASEM swaps in
China, Hong Kong, Pakistan and Cyrillpink, while they were in India unidirectional from the ASEM
to the foreign exchange market. Regarding the relationship between market fluctuations and the
impact of shocks, the results of the study clarified the significance of the impact of shocks, especially
the opposite, as their effect appears clearly on the fluctuations of the two markets in all the countries
of the study. Regarding the Egyptian financial market, Wagdi, Sherif & Azmy, 2016 studied the
correlation between the share of dividends and the performance index of the Egyptian Stock Exchange
EGX30 - and by using Egyptian data for the period (2008-2015), Pearson's correlation coefficient was
estimated, which came It is not significant, which is what the researchers explained by the high risks
that followed the January 2011 revolution, which had a negative impact on the indirect foreign
investment flows into the Egyptian money market.
In the study (Barkat et al., 2015) on the impact of a number of quantitative economic variables on the
population in emerging economies by applying them to Egypt and Tunisia, and using monthly data in
the period (January 1998 and January 2014) and based on their testing. The causality was determined
by Ranger and the joint integration of Guyans, and after - testing the unit root, the relationship
between the performance of the financial market in the two countries and each of the interest rate,

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money supply, inflation rate and exchange rate was evaluated. The results of the assessment confirmed
the importance of these economic variables in the two countries. The effect on the population in the
two countries, whether in the short term through the causation test, or in the long term, in light of the
results of the joint complementarity test.

In Kenya, Fredrick, Muasya and Kipyego (2014) studied the relationship between the exchange rate in
the money market in Nairobi. By using the monthly data for the period (January 2012 - December
2013), the Pearson correlation coefficient was estimated between the two variables, and the study
concluded that there is a direct correlation packet between each of the two variables. This is what the
researchers interpreted by the existence of a bidirectional cartouche, meaning that the improvement of
the Kenyan currency exchange rate against the US dollar raises the ASEM prices. Also, the rise in
asset prices in the financial market improves the exchange rate of the Kenyan currency against the
dollar, despite the fact that the correlation coefficient is a measure of the correlation of the change
between two variables and is not an indication of the existence of a box between them.

In a comparative study between the stock exchange markets in the Kingdom of Saudi Arabia and the
United Arab Emirates, Mgammal (2012) estimated the effect of exchange rates, interest and inflation
rates on the share prices in each region. By using monthly and quarterly data in the period (January
2008 December 2009) and depending on the regular least squares method for estimating the
parameters of the regression model and the correlation coefficient of Pearson, the estimation results
varied in the two markets, as the UAE financial market was characterized by the significant effect of
the exchange rate on the whole population. On the short and long term, the value of the index has
changed from positive in the short term to negative in the long term, while this effect did not appear in
the Saudi market, either in the short term or in the long term. The monetary policy, which is the
interest rate on the fluctuations of the basic market performance index in Bangladesh, the study (AL-
Mukit, 2012) assessed and based on tests of joint integration - that is, using the data of common sense
between 1997 and 2010 for Guyans, the causality of Ginger and the model Correcting the error. The
estimation results showed the existence of long-term equilibrium boxes that go directly from the
exchange rate and inversely from the interest rate to the index of the prime prices. The error correction

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factor came at a rate of 7.8%. A single box of the asset price index to the exchange rate, and from the
interest rate to the asset price index. And about the effect the exchange rate is based on sectoral
performance indicators in the stock market in Taiwan and by application on 110 establishments that
include each of the technology sectors, the services sector, and the manufacturing sector.

The results of the estimation of the regression model in the study (Hsiao & Hun, 2012) showed a
positive effect of the change in the exchange rate on the revenues of the public establishments in the
three sectors that comprise the study sample. In an attempt to answer the question, whether the
quantitative economic variables can explain the change in the stock returns in the long term, a study
(Hassan & Refai, 2012) came up to examine the impact of each of the international reserves of foreign
exchange, the oil price, the interest rate, the inflation rate, and the growth of supply. In addition to the
ratio of exports to imports on the general index of the performance of the Jordanian stock exchange
“Morgan Stanime” and depending on the “ARDL” model, the results of the assessment came to
confirm the importance of both international reserves and the growth of money supply in the impact
on the performance of the Jordanian financial market index, Where both the price of oil and
international reserves were distinguished by their opposite effect, which is statistically significant on
the market index, while the general sign of the money supply was positive, indicating the positive
effect of this variable on the financial market performance index in Jordan.

In the study (Agrawal et al., 2010) on the dynamic relationship between the oscillating market
fluctuations and the change in the exchange rate of the Rupee using daily data in the period (October
2007 March 2009) and after making sure that the time profile of the two variables was stable, the
results of the estimation of the Correlation coefficient: There is a negative correlation between the
performance of the Canadian Stock Exchange “Nifty 50” and the exchange rate. Using the Ganger
Causality test, the test results came to confirm the existence of a one-way box from the stock returns to
the exchange rate.

After this presentation of the previous studies, it becomes clear that the temporal boundaries differ
from one study to the other and that the spatial boundaries are similar in some of them, with their

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diversity in the use of standard methods. The results of the estimation varied interchangeably,
especially with regard to the relationship between the exchange rate and the inflation rate, and the
change in the performance indicators of the basic market in the short and long terms, although most of
them agreed about the role of actions and the previous information about them in influencing trends
and changes It decided the current and future performance of this market. If many of the previous
studies examined the interpretation of the phenomenon of financial market fluctuations by means of
the various quantitative economic indicators, the current study focuses on examining the relationship
between the performance of the Egyptian market index and two basic variables of the economic
stabilization indicators, namely The exchange rate and the inflation rate, and consider their effects
under the test of the hypothesis of the heterogeneity of the error limit variance, due to the nature of the
special characteristic of the financial and economic variables related to instability, as well as the
evaluation of the efficiency of this market, and through the combination of self-regression models with
time gaps. Distributed by using the boundary test as an input to the joint integration and generalized
models - (for the self-regression conditional on the instability of the error limit variance using data for
the period (January 2000-February 2020), which was not available in the previous studies that were
conducted on the Egyptian financial market.

2.2. The most important features of the Egyptian stock market performance index and the
changes in the exchange rate and the inflation rate

The Egyptian financial market is one of the most important Arab financial markets, and it is the oldest
in demand, since its construction dates back to the establishment of the Alexandria Stock Exchange in
1883, to be followed after that by the establishment of the Cairo Stock Exchange in 1903. This market
was exposed to many political and economic events that had an impact on its performance indicators,
the most important of which were the events of September 2001, then the Arab war in March 2003, in
addition to the events of the January 2011 revolution, whose effects extended for years until stability
returned. The political to Egypt. All these events were reflected in the performance of the Egyptian
Stock Exchange. This period also witnessed many changes in the economic level, the most important
of which was the global financial crisis in 2008, and other changes in the exchange rate regimes

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applied in the decision to float in November 2016, It also erected waves of significant rise in the rate
of inflation. Figure (4) following shows the relation between exchange rate and inflation.

Figure 04, Relation between exchange rate and the customer price inflation.

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 CHAPTER 3

RESEARCH METHODOLOGY

3.1. Model Selection.

After reviewing all previous literature we selected, the analytical descriptive method is used for this
study, while using a number of standard methods to answer the three-year study questions, as to avoid
the false regression that may result from the use of the least squares method in the absence of
applicable conditions, the importance of conducting the stability tests of the semicircle.

3.2. Theoretical Framework,

We aim to move to applying the self-regression model distributed with slow periods using the
“ARDL-Bounds Test” in order to test the existence of long-term boxes that are based on the
explanatory variables used in the study, namely, the inflation rate and the exchange rate to the
dependent variable, which is “EGX30”.
There are two independent variables and one dependent variables that formulates the theoretical
framework of the research, as shown in the below figure,

Inflation rate
The performance index of the
Egyptian stock market
(EGX30)

The nominal exchange rate for

the EGP

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Figure 05, Theoretical framework - Dependent and independent variables.

3.3. Models variables description.

3.3.1. The performance index of the Egyptian stock market (EGX30):
There are many indicators used in the Egyptian market, which reflect the performance of this market.
Approval is made before March 2012 on the Egyptian Stock Exchange Index (Case30, which has
changed since that date to replace the index), (EGX30, as was announced for the index), (EGX70, and
in August 2012, the index) (EGX100, which includes the companies that compose the (EGX) 32 index
and the index). (EGX70) In October 2009, the EGX20 Capped index was announced to replace the
index.
EGX30Capped in February 2019, and this new index includes the top 30 companies in terms of total
trading value and liquidity, and this index has been calculated as of January, 2003, and in February
2014, the Nile Index was announced and it was calculated from July, 2012, and in August 2015, it was
taken into account. The Egyptian Stock Exchange Index is of equal weights (EGX50 EWI), which
includes the 22 largest companies in terms of liquidity and activity.
As of July 2009, in February 2010, the EGX70GWI index of equal weights was announced to replace
the EGX70 index. This index is based on the performance of the best 70 companies on the Egyptian
Stock Exchange in terms of liquidity value and activity, after excluding the companies that compose
the EGX30 index. January 2008 (Central Bank of Egypt, April 2020)
The current study relies on the Egyptian Stock Exchange Index (EGX30) as it is one of the oldest and
most important performance indicators of the Egyptian Stock Exchange available, providing data on
performance indicators for the same variable during the study period, which extends from January
2000 to February 2020.and the most important sources for these data are Central bank of Egypt,
Central Agency for Public Mobilization and Statistics (CAPMAS) Egypt and Financial Regulatory
Authority.

3.3.2. The Nominal exchange rate for the EGP:

The nominal exchange rate of the earners is measured by the unit value of the US dollar in units of the
Egyptian pound. Data for this variable were used for the period under study, depending on the

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international financial statistics issued by both the International Monetary Fund and the World Bank.
On the reference to the estimated generalization of the exchange rate, there is a discrepancy in the
economic literature about the signal and the direction of the exchange rate.
The relationship between the stock exchange returns and the exchange rate, in the study of each of
(Dornbusch & Fischer 1980) based it on the input of the market in the interpretation of this
relationship, by studying the effect of fluctuations in the exchange rate on the competitiveness in the
international markets of hearing, the decrease in the price of the national currency increases From the
competitiveness of national exports in foreign markets, in a way that improves the position of the
protected companies, and thus raises their value in the stock market, and vice versa when the value of
the national currency improves, their competitiveness decreases and the market value of the traded
shares decreases. This explains the inverse relationship between changes in the price of the national
currency. Consequently, the generalized sign of the estimated exchange rate is expected to be positive,
based on the concept of the exchange rate used, which is measured by the unit value of the US dollar
in units of Egyptian pounds. On the other hand, the portfolio equilibrium model shows the existence of
a direct box between The exchange rate and the share price, but they move from the currency market
to the currency exchange rate through the balance of capital transactions and indirect foreign
investment flows, which is what they provided), as investors tend to move towards the balance of
capital transactions and indirect foreign investment flows. Diversifying the components of your
financial portfolio between protected and foreign assets, including that currency. The share price plays
a major role in determining the components of this portfolio, as an improvement in the national stock
market leads to foreign investment flows in the form of investment in the financial portfolio to this
The economy, which contributes to an improvement in the value of the national currency, and vice
versa when there is a state of deterioration and instability in the national capital, which would lead to
the flight of indirect foreign investments, and thus a deterioration in the national currency exchange
rate.

3.3.3. Inflation
The inflation rate is measured by the rate of change in the price index, and the consumer price index
was used as a measure of inflation, and the index inflation rate was calculated as the rate of change in

18 | P a g e
this number between the month in the current year and the same month in the last year, taking into
account the calculation of each of them according to the same base year. The most important data
sources for this variable are the statistical yearbook issued by the Central Authority for Public
Mobilization and Statistics, as well as the quarterly reports and news bulletins issued by the Central
Bank of Egypt.
And on the reference to the estimated generalization of the rate of inflation, and based on the
economic literature in this regard, the sign of the estimated generalization of the rate of inflation may
be positive or negative, and this is because the economic literature about that is confused, since
according to the effect of "Fisher" in the long term there is a trend of changes in the nominal interest
rate At the same rate and direction of change of the expected rate of inflation, which means that a
blind inflation rate increases the nominal rate of return in the main figure, but with the stability of the
real rate of return on the basis, as the investors have been fully compensated as a result of the high rate
of inflation, which is a hedge against inflation. . On the other hand, there is an inverse box between the
market performance index and the inflation rate, and this is due to the inverse correlation between the
inflation rate and the economic growth rate, which is measured by the rate of change in the real GDP.
The high rate of inflation reduces the rate of economic growth, which in turn leads to the tendency of
individuals to reduce the demand on financial assets, especially at high inflation rates and thus lower
stock prices) and the natural logarithm formula for the values of these variables was used to achieve
the hypothesis of linear relationship between the study variables, and to reduce the differences
between their values and units of measurement, and also allowing that The estimated parameters
represent the elasticity’s, i.e. the relative influence of the exchange rate and the rate of inflation on the
performance index of the Egyptian stock market.

3.4. Developing the Hypothesis

After reviewing the research literature, it is clearly shown that the dependent and independent
variables can be developed as the following:

H01: There is a relation between the Nominal exchange rate for the EGP on the performance index of
the Egyptian stock market (-ve relationship).

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H02: There is a relation between the rate of inflation on the performance index of the Egyptian stock
market (-ve relationship).

3.5. Research design.

In addition, after verifying the unavailability of assuming the stability of the random error limit
variance in the regression model that is based on the conventional standard least squares method, a
generalized self-regression model was used that is conditioned by the non-stability of the random error
limit variance. ”“GARCH”The standard loading steps were applied using the program“ GARCH ”.
EView-V10 is as follows:
3.5.1. Stability and determining the degree of integrity of the time series of the study variables:
Most of the time series of the quantitative economic variables suffer from inactivity and the existence
of the unit root, and the use of such series in the estimation without treatment leads to the presence of
a false regression between the variables, which requires the necessity of conducting stability tests of
the time series before determining the estimation method. Extended Dick Fuller ADF and FEMIPS-
PERON PP test to test the stability of the time series of the variables under study, where the chances
of nullity are represented by the presence of the unit root meaning that the unstable sagacity is at the
level, as opposed to the alternative hypothesis, which is that the sumptuous is stable in the level, and
when the assumption of the assumption is accepted. Therefore, it is not possible to rely on the results
of the regression in explaining the relationship between the variables under study, and it is necessary
to search for another method to estimate the relationship between them.
3.5.2. Estimating the long-term relationship between the exchange rate and the inflation rate as
explanatory and index variables Egyptian Stock Exchange EGX30 using a ARDL –Bounds Test
model
The model used in estimating the relationship between the explanatory variables and the dependent
variable is determined based on the result of the unit root tests, and the estimation of this relationship
has been based on the self-regression model distributed with slowdown periods using the boundary
test as an input to the subscriber's integration that they provided (Pesaran et al 2001 (2001)).
Estimating the relationship based on this model in light of the varying degree of complementarity of

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the time series for the study variables, so that some of them are stable at the level and the others are
complementary in the first degree.

By applying the ARDL model to the study variables in its logarithmic form, namely the Stock
Exchange Performance Index (LEGX30) , the nominal exchange rate(LExr) and the inflation rate
(LInf), it is expressed in the following general form
((α _3 α) _2 (, α) _1) and α_0 refer to long-term multiples by which the long-term parameters of the
explanatory variables are derived from each other. ( (1, i)_ β),(2, i,) _ β ,(3, i) _ β)re the short-term
parameters, (ε_ (t) the random error term.
This model is based on testing the null hypothesis that: (H_0: α_1 = α) _2 = α_3 = 0, meaning that
there is no long-term equilibrium box between the variables under study. Against the alternative
hypothesis (H_1: α_1 ≠ α) _2 ≠ α_3 ≠ 0, in the presence of long-term cartridges. When rejecting the
null assumption, this indicates the existence of a long-term package between the three variables, the
performance index of the Egyptian Stock Exchange, and both the exchange rate and the inflation rate,
and that depends on the degree of statistical significance for choosing “F” using the test.

3.5.3. Error Correction Model "" ECM

After making sure of the existence of a long-term equilibrium box between the stock index, exchange
rate and inflation rate using the “ARDL-Bounds Test” model, through the error correction model, the
speed of correcting short-term errors in the unit of time is estimated in the current study, in order to
arrive at Establishing a long-term equilibrium by estimating the joint integration equation (Coin Eq)
-1, which requires that the value of its estimated generalization be between (9) -2, in order to ensure
the existence of a partial adjustment factor in the unit of time for imbalance errors.

3.5.4 Generalized Autoregressive Conditional Heteroskedasticity (GARCH)

The estimation of the linear regression model using the regular least squares method is based on
several assumptions that are partly used by the random error term, including the following:
A- The constancy of the random error anisotropy.
B- There is no self-correlation between the values of the random error limit.

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If this is not available for the regression model, then the estimated parameters will be inefficient
despite the availability of impartial conditions. In general, the time series data for some economic and
financial variables, such as asset returns, interest rate and exchange rates, relate to the effect of
previous information and fluctuations in these variables on the smoke and its current trends. In the
sense that the occurrence of large previous fluctuations in the returns of the ASEM are usually
followed by large fluctuations in these returns.
As well as the occurrence of small fluctuations in previous periods, followed by small fluctuations, as
there is a pattern that characterizes the variation of the error limit of these variables in the form of
fluctuations that follow a certain pattern that defines the typicality of the fluctuations, "Volatility
Clustering, and not in a random movement image," which requires the necessity to ensure the
availability of These characteristics of the market data in Egypt were taken into consideration for an
arbitrator on market efficiency. To estimate its effect on this market and test its significance, reliance
is made on the self-regression models conditional on error term variance instability (ARCH) p
(formulated by Engle (1984) and developed by Bolleselev (1986) to generalized models of self-
regression conditional on the instability of the random error term variance. ”) “GARCH (p, q), the
following equation No. (0) shows the basis on which these models are based:
εt | I (t - 1) ~ N (0, σt2) (2)
In the previous equation () (0), (t) denotes the random error term which is expressed as residuals, (t2).
This equation reflects that the condition of constancy of the variance of the error term, which is
expressed by the variance of the residuals at
The estimation is not achieved, as the limit of random error becomes conditional on the previous
information), “I (t - 1), which
The variance is concluded from one period to the next according to these generalizations, and is not as
constant as it is assumed according to the squares method.
Ordinary micro.
The variance equation in the (GARCH) model 1.1 is as follows:
σ_ (t) ^ 2 = ω_0 + ω_ (1) ε_ (t-1) ^ 2 + ω_2 σ_ (t-1) ^ 2 (3)
Equation No. (3) clarifies that the variance of the residuals variance (((σ) _ (t) ^ 2) in this model
depends on the square of the residues with a single slowing period that is indicated in light of the

22 | P a g e
common data used in the study, as well as the square of the residue variance during the previous
month. (σ_ (t-1) ^ 2) (((ω) _ (2,) (, ω) _ 1) measures both the ARCH effect and the GARCH effect on
the arrangement. Among the conditions for the results of the previous equation estimation is the
achievement of a non-negativity constraint, meaning that it is. 0, ω_ (1), ω_2≥ 0
When using the number of slowdown periods (P) for the square of the residuals and the number of
slowing periods (q) for the variance of the residuals, the model used becomes “GARCH (p, q”) and the
variance equation is as follows:
σ_ (t) ^ 2 = ω + ∑_ (i-1) ^ p=α_i _ ε_ (t-i) ^ 2 + ∑_ (j = 1) ^ q=α_j σ_ (t-q) ^ 2 (4)
The parameters ((α_ (i), α_j) in Equation No. (8) measure both the ARCH effect and the ARCH effect,
respectively.
The study used the “GARCH M” (1.1) model, which depends on the estimation of two equations, the
first equation, the conditional mean equation, through which the effect of the set of explained variables
from the exchange rate and inflation rate on the dependent variable is taken into account, provided that
the previous information is taken into account when An estimation of this equation, and through this
equation also a generalized estimate is made that reflects the significance of the impact of the degree
of risk in this market and its effect on the rate of return in the market, which will be measured by the
rate of change in the performance index of the Egyptian Stock Exchange. Variance Equation The
variance equation is based on the fact that fluctuations in stock returns are due to previous fluctuations
in these returns, as well as the effect of historical information on stock returns, and depends in its
estimation on the average equation, which will base estimates in the current study on the results of the
study of the ARDL-Bounds As in Haughton & Iglesias, 2017 model).

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 CHAPTER 4

DATA ANALYSYS

4.1. Below shows the results of the tests for the stability of the time series of the study variables.

Without trend and

with intercept With trend and intercept intercept
variable Test Level Variances Level Variances Level Variances

… …. … …. ….
1.140663 19.9456 1.91032 19.9146 1.47246 19.8062
ns 3* 3ns 2* 4ns 3*
ADF (0.69999) (0.00000) (0.6460) (0.0000) (0.9652)) (0.0000)
…. ….. …. ….. ….. …..
2.701214 41.4431 9.77251 41.4067 0.976274 41.5573
ns 6* 3* 6* ns 4*
EGX-30 PP (0.0753) (0.0001) (0.00000) (0.0000) (0.9129) (0.0001)
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 …. …. …. …. …. ….
3.436540 11.5590 12.7690 11.5337 0.03390 11.5599
** 4* 6* 6* 9ns 3*
ADF (0.0107) (0.0000) (0.0000) (0.0000) (0.6705) (0.0000)
…. …. …. …. …. ….
EGP 11.31578 180.431 13.8725 179.806 1.56046 101.580
exchange * 0* 9* 4* 8ns 6*
rate PP (0.0000) (0.0001) (0.0000) (0.0001) (0.1114) (0.0001)
…. …. …. …. …. ….
2.067964 7.36055 1.58913 7.49461 0.00602 7.35189
ns 1* 6ns 3* 2ns 3*
Inflation ADF (0.2580) (0.0000) (0.7946) (0.0000) (0.6797) (0.0000)
…. …. …. …. …. ….
2.359510 11.7714 2.31723 11.8244 0.556481 11.7972
ns 9* 9ns 4* ns 2*
  PP (0.1545) (0.0000) (0.4226) (0.0000) (0.4753) (0.0000)
Table No. (1): Results of the tests for the stability of the time series of the study variables

The numbers between practices indicate the probability level of a test.

ADF: Augmented Dickey-Fuller Test
PP: Phillips-Perron Test

At probability level: ** 2.29 significant, at probability level: ns 2.22 insignificant

It is evident from the previous Table (1) that the performance index of the Stock Exchange was not
stable in level, according to each of the "Extended Dicky Fuller" test and the "Phillips-PERON" test,
except for the presence of the cutter and the time bound, where the apex was stable according to the
PP test. Regarding the exchange rate, the time aspect was stable in the level according to each of the
two tests except for the absence of a breaker and time bound, and it was not The time aspect of the
inflation rate is stable in the level according to the two options in the three cases, but it was stable in
the first lines, meaning that it is complementary in the first degree. And in light of this fluctuation
between the degree of stability of the time series of the study variables, and the degree of stability
ranged between (I) 0 and (I) 1. The ARDL model is required to estimate the association between them.
2 Results of the assessment of the “ARDL” model. After making sure that the degree of stability of

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the time series for the study variables fluctuated and ranged between (I (0), I) 1 comes estimation of
the self-regression model distributed by the slowdown periods, and Table No. (0) following the three
divisions (a, b, c), clarifies the results of the assessment.
4.2. Boundary Test Results - Common Integration Entrance
Test Calculated Statistical Minimum I(0) Maximum I(1)
value of (F) significance
level
Test (F) 7.347317 3.35 2.63 10%
3.87 3.1 5%
4.38 3.55 2.5%
5 4.13 1%
X
Table No. (02): Results of estimates of the “ARDL (1,1,1) and Bounds Test” model

4.3. Results of error correction factor estimation

Index Coefficient Std. Error t-Statistic XProb

D(LExr) 0.072617*** 0.041836 1.735731 0.0839

D(LInf) 0.085124ns 0.187331 0.454403 0.6500

CointEq(-1) -0.212675* 0.038981 -5.455827 0.0000

4.4. Results of long-term evaluation of generalizations

EC = LEGX30 – (4.9713 + 0.6507*LExr + 0.9496*LInf).

Index Coefficient Std. Error t-Statistic XProb

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 Intercept 4.971307 0.539524 9.214248 0.0000

LExr 0.650683 0.257283 2.529054 0.0121

LInf 0.949649 0.223229 4.254146 0.0000

(DLEXR, DLINF, DLEGX30) refers to the first branches of the study variables, performance index,
exchange rate and inflation rate in its logarithmic form - The imposition of nothingness to test the
limits is that there is no long-term equilibrium box between the study variables. Preparation tables
(Pesaran et al 2001)
: *** - denotes the statistical significance of the estimation generalization at 92% level of significance
It is evident from Table No. (0) that it is divided into three sections (A, B, and C), where the first
section shows the growth of the boundary test result, which is carried out by testing the presence
of long-term equilibrium boxes that evolve from the explanatory variables in the study, namely the
inflation rate and the exchange rate to The performance index of the Egyptian market, and in the
framework of the previous ARDL equation No. (9), this model is based on the following
hypothesis test:
Nothingness Assumption: (H_0: ∝) _1 = ∝_2 = ∝_3 = 0, meaning that this relationship does not exist.
As against the alternative hypothesis,: (H_1: ∝) _1 ≠ ∝_2 ≠ ∝_3 ≠ 0 meaning there is an isometric
box.
It is evident from the calculated value of F that is greater than the blind critical value, which means the
rejection of the null hypothesis and the acceptance of the alternative hypothesis, that is, the
existence of a long-term equilibrium box that flows from the exchange rate and inflation rate to the
stock performance index at a significant level of 9%.
Section (b) of Table No. (2) illustrates the results of estimating the short-term parameters and the error
correction factor, as the exchange rate and the inflation rate are distinguished by the positive effect
of each of the two factors on the performance index (EGX30), even if the generalized estimated
inflation rate is not statistically significant, while the exchange rate in statistical terms with a
degree of confidence exceeding 12%. The error correction factor was estimated at about 09% and
statistically significant at a significant level, 9% meaning that approximately 09% of the short-

27 | P a g e
 term errors in the performance index of the Egyptian Stock Exchange are corrective towards the
long-term balance, and this correction will take what Approximately five was indicated.
Despite the difference in the variables in a significant degree that affects the performance index of the
Egyptian Stock Exchange in the short term, but in the long term, and as is evident from Section
(C) in Table No. The level of significance, 9%, which means the positive effect of each of them on
the changes in the market performance index in Egypt. The estimated equation in the long term is
as follows:
(5) LEGX30 = 4.9713 + 0.6507LExr + 0.9496LInf
(4.254146) (2.529054) (9.214248)
In the previous equation No. (2), the numbers in parentheses show the calculated value of (t), and the
estimated generalizations express the flexibility of the performance index for variables in both the
inflation rate and the exchange rate. - By 9%, this would lead to an increase in the EGX30 index
by 2.22%, while leading to a decrease in the exchange rate
The improvement in the value of the Egyptian pound against the dollar - by 9% to a decrease in the
market performance index by 2.22%.
To test the stability of the estimations, a choice was made to estimate the cumulative “Recursive
Estimate
It is evident that the aggregate values of errors lie between the limits of confidence at a significant
level of 2%, which indicates that the estimates were stable over the time period under study.

4.5. Results of the “ARCH Test”: The presence of this problem,

Which is one of the most important reasons for using the ARCH & GARCH models, is confirmed by
two names:
A - Graph of market returns impulses. B- ARCH test
The following are the results of each of the two:
B- The graph of market returns impulses:
Many financial and economic variables, including financial market performance indicators, are
characterized by a typical characteristic of a trend
Which makes the changes in them follow a certain pattern, as the periods of the previous large

28 | P a g e
 upsurges follow the large ones.
As well as the previous small swatches followed by small swatches. Figure (2) below reflects the
pattern of relative changes
In the Egyptian Stock Exchange Performance Index (dlegx30), using the following equation
dlegx30 = ((EGX30) _t- EGX30) _ (t-1)) / (EGX30) _ (t-1) (6)

B- The ARCH Test

Table (3) that follows shows the results of testing the presence of an unstable residual variability
problem using the hair data.

For the ASEM performance indicator.

Test Statistic value XProb

F-statistic 17.99629 0.0000

Chi-Square 16.87177 0.0000

Table No. (3): ARCH test results for residual anisotropy

The preceding Table (3) shows the results of the test of the variability of residual variability
instability, where it is evident that there is an effect of “ARCH” in the time aspect representing the
returns of stocks, because the probability value of both “F” and “Chi-test” is less than 2.22. The
alternative hypothesis is the existence of the variability of residual variability problem, meaning
the existence of “ARCH Effect”, which enables the use of generalized models of subjective
regression conditional on the variability of variance “GARCH” that takes into account the effect of

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 each of the variations in returns and previous information on current yield trends and the order of
the model is determined based on On the slowdown periods used.

4.6. Results of the model estimation (ARDL, GARCH M)

based on the standard method used in DR (Haughtan and Iglesias, 2017), which were based on
the estimates of the ARDL model in estimating the impact of previous events in one period
through the GARCH 1.1 model They depend in their formulations on a study (CHen et al.,
2013) on the effect of oil prices on fertilizer prices, and the current study will highlight the
(GARCH) 1.1 model of the effect of the degree of risk in the Egyptian stock market on the
returns of this market through the (GARCH M) 1.1 model based on To the results of the
ARDL model estimates, Table (8) below shows the assessment results.

A) Mean Equation
Test Coefficient z-Statistic XProb

Intercept 0.196360 16.40067 0.0000

LEGX30(-1) 0.949123* 292.4260 0.0000

LEXR 0.031120* 3.649251 0.0003

LEXR(-1) 0.032481* 4.388265 0.0000

LINF 0.039936* 5.068712 0.0000

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 LINF(-1) 0.000509ns 0.068497 0.9454

GARCH 0.019819*** 1.814684 0.0696

Table No. (4): Results of estimates of the “ARDL, GAR” model

B) Variance Equation
Index Coefficient z-Statistic XProb

Intercept 1.87E-05 0.514756 0.6067

RESID(-1) ^2 0.830715* 12.88808 0.0000

GARCH(-1) 0.233343* 7.180655 0.0000

C) Quality test of model and Autocorrelation

Schwarz Akaike info Durbin-Watson R-squared
criterion criterion stat
-1.510882 -1.655909 2.581981 0.784829

D) Autocorrelation for errors

Q-Stat Prob. Q-Stat Prob. Q-Stat Prob. Q-Stat Prob.
[2] [4] [6] [8]

0.9522 0.621 1.7292 0.785 2.0634 0.914 3.6436 0.888

It is evident from the previous table, that it is divided into three sections (a, b, and c). Section (a)
presents the growth of the results of estimating the mean equation according to the (GARCH 1.1)

31 | P a g e
 model based on the estimates of the ARDL model. The significance of the effect of changes in the
exchange rate and the inflation rate on the changes in the performance of the Egyptian Stock
Exchange with a degree of confidence. This section of the previous table also shows that the
previous changes in the stock index for the period of slowing down one month and by 9% would
lead to a change in the current return of (2.12%) with a significant level of 9%. This is why this
parameter is less than 9%. With regard to the effect of the degree of risk to which the number will
be exposed, the GARCH generalization reveals its significant effect on the changes in the
performance index, as this parameter was estimated at about 2.20 with a degree of confidence
greater than 12%, where the magnitude of the probability value of the z statistic is about 0.07.

In section (b) of the preceding Table (8), it is clear from the results of the estimation of the
variance equation the significance of the estimated parameters for each of the “Res (-1)” effect and
“GARCH (-1)” “GARCH” effect, and the verification of each one, provided no
Negativity. The generalization of the effect of ARCH towards (0.83) has a significant level (1%),
which means that the information in the previous values of the residual square have a significant
effect on the current trends in the market performance index, and the generalization of the GARCH
effect was estimated at about (0.23) with a significant level of 1%, which reflects that the previous
information about the variability of the residuals significantly affects the current variations of the
market performance index with a degree of confidence. 99% In light of the results of the
estimation of the variance equation, the effect of each of the previous fluctuations on the returns of
the components as well as the historical information on the performance of this market on the
current fluctuations thereof, which is not compatible with the imposition of the weak formula for
the market efficiency, which is defined by the theory of stochastic movement. The elements of the
overall market that changes in the price of the asset in the future are completely independent from
the changes that affected its price in the past, and depend on the information that will be available
tomorrow, and therefore the price of the stocks may increase tomorrow or it may decrease or
remain constant based on these information that will be provided by the efficient market and are
reflected in the market value of the securities traded in them in light of the results of estimating the
variance equation The theory of stochastic movement, which assumes the inability to predict

32 | P a g e
 returns on investment in stocks through the use of previous information about the trends and
fluctuations of these returns, is that the Egyptian stocks are not efficient, and the estimation results
confirm the pattern of the movement of the stock performance index, which may be common to
some dealers. In the market and not being available to some others, which enables speculators,
through an arbitrary failure, to achieve extraordinary profits.

In section (c) of the preceding Table (8), the value of the determination factor shows the high
explanatory power of the model variables used in explaining the changes in the Egyptian stock
market index, as its value is about 0.78. This means that about 78% of the changes in the Egyptian
Stock Exchange Performance Index are made. Explanation by means of changes in the set of
variables used in the model, while about 22% of the change is due to other variables not included
in the model, they are included in the random error limit, reflecting the quality of fulfillment of the
used model. The test coefficient D.W shows that there is no self-correlation problem between
errors. To make sure of the absence of this problem, the Q test was performed, where the
probability value of this test for the end of the autocorrelation order shown in Table (4) above was
greater than the level of significance, 5%, which means acceptance of the null hypothesis, which is
the absence of self-correlation between the residues.

CHAPTER 5

CONCLUSION AND RECOMMENDATION

The research examined the effect of changes in the exchange rate and the inflation rate on the stock
market index in Egypt (EGX30), using monthly data from (January 2000 - February 2020) and
depending on the time series stability tests for the three study variables using the "Dicky Fuller
Extended" ADF test and the "Phillips-PERON" PP test. As a result, the study relied on the (ARDL-
Bounds) Test model as an input to the subscriber's integration, and the results of the boundary test
showed the existence of long-term equilibrium boxes ranging from the exchange rate and inflation rate
to the performance index of the Egyptian stock market. Where the signal came to each of them

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positive and statistically significant with confidence degree, 11%, and based on the ECM model, the
error correction factor was estimated at (-0.213), Which reflects that about 21% of the short-term
errors are corrected during the unit of time, which are two ranges indicated in the study to reach the
long-term equilibrium. Regarding the short-term generalizations, the estimated generalizations for
both the exchange rate and the inflation rate were positive as well as in the long term, but they were
not significant with respect to the inflation rate. Based on the results of the ARCH model estimation,
ARDL parameters were estimated the “GARCH M” model (1.1) with the mean and variance
equations, the results of which were to confirm in the variance equation estimated that the previous
information of the residual quadrant fluctuations had a significant effect on the current fluctuations in
the main market performance index, in terms of the generalization of the ARCH effect towards
(0.83)with a significant level) The generalization of the effect of GARCH towards 0.23 was also
estimated at a significant level, 1%, which reflects that the previous information about the residual
variance has a significant effect on the current trends of the stock performance index with a degree of
confidence, 99% as indicated by the average equation of the positive effect for each of the degree of
risk Which are exposed to the Egyptian shares, as well as changes in the exchange rate and the rate of
inflation on the fluctuations of the returns of the shares. And based on these results, and what I have
shown of the impact of each of the previous fluctuations on the returns of the shares, as well as the
historical information about the performance of this market on the current movements in it, the study
concluded the inefficiency of the ASEM in Egypt, due to the lack of compatibility
With the hypothesis of the weak form of market efficiency, which is defined by the theory of
random movement.

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 Figure (06) – Inflation during last two quarters of the year 2020 – Source CBE.

In light of the results of the study and the answers to the three questions of the study, the study
recommends the following:

1- Raising the efficiency of the Egyptian market: There is no doubt that there is a close
relationship between economic growth and the growth of the financial sector, which is one
of its main components, and from this comes the importance of developing the Egyptian
market and working to raise its performance efficiency, especially in light of what the
current study has stained. Their inefficiency based on the weak hypothesis of market
efficiency or what is defined by the random movement theory, which reflected the
importance of historical data and previous assumptions in determining my current returns.
This requires the need to work on making information available to all dealers in this market

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 in order to limit the impact of speculation and thus limit the adverse effects of
developments on the stability of the Egyptian stock market.

2- Achieving stability in the exchange rate and limiting the rise in the inflation rate: Both the
exchange rate and the inflation rate are one of the most important indicators of economic
stability that have an impact on investment decisions, whether real or financial, and then on
the stock market. Hence the importance of stabilizing the exchange rate and limiting the
rise The great inflation rate is to maintain the stability of the Egyptian market, and the
researcher believes that this is achieved through work to strengthen the national production
structure, in order to achieve a greater amount of the needs of the protected demand and
reduce dependence on the outside and increase the sources of foreign exchange, thus
earning the two years a degree The stability will be reflected positively on the Egyptian
market.

3- Opening new vistas for future studies: The study was based on judging the efficiency of the
stock market in Egypt on the theory of random movement, and it represents objective limits
for this study that can change and re-evaluate the performance of the stock market in
Egypt, as well as the possibility of changing its time limits, especially in light of what is
exposed if World economies from negative economic impacts as a result of the Corona
pandemic, which did not poison it into global financial markets, including Egyptian stocks.

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 REFERENCES:
Official website of the Egyptian Exchange - https://www.egx.com.eg/en/homepage.aspx

Exchange Rate and Current Account - Dornbusch & Fischer 1980 -

http://www.mit.edu/~14.54/handouts/dornbusch80.pdf

Stock Returns, Real Activity, Inflation, and Money - Schwest(1981) & Fama 1981-
https://www.jstor.org/stable/1806180

MACROECONOMIC DETERMINANTS OF THE STOCK MARKET MOVEMENTS: EMPIRICAL

EVIDENCE FROM THE SAUDI STOCK MARKET - MOFLEH ALI MOFLEH ALSHOGEATHRI –
1988 - https://krex.k-state.edu/dspace/bitstream/handle/2097/11989/moflehalshogeathri2011.pdf?
sequence=1

Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and
Developing Countries - Md. Mahmudul Alam - Universiti Utara Malaysia -
file:///C:/Users/Mohamed/Downloads/Relationship_between_Interest_Rate_and_Stock_Price.pdf

THE DYNAMIC RELATIONSHIP BETWEEN STOCK PRICES AND EXCHANGE RATE - AN

EGYPTIAN EXPERIENCE - Justin Nelson Michael - Kristu Jayanti College 2018 -
file:///C:/Users/Mohamed/Downloads/Nelson-IJRESS.pdf

Does the inflation rate affect the performance of the stock market? The case of Egypt - Mohammed
Omran - Arab Academy for Science, Technology 2001 -
https://www.researchgate.net/publication/222297380_Does_the_inflation_rate_affect_the_performanc
e_of_the_stock_market_The_case_of_Egypt

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