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Are Volatility Spillovers between Currency and Equity Market Driven by Economic States? Evidence from the US Economy

Economics Letters, Vol. 127, 2015

Posted: 29 Jan 2015 Last revised: 9 Apr 2015

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Date Written: January 5, 2015

Abstract

This study examines the volatility spillovers between the foreign exchange rate markets of three of the USA’s major trading partners and the US stock market, utilizing the forecast-error variance decomposition framework of a VAR model proposed by Diebold and Yilmaz (2009). The empirical results, based on a data set covering the period 1986-2014 suggest that the level of total volatility spillover effects is high only when they precede periods of economic turbulence. If the economy is quiet, volatility spillover effects are virtually non-existent.

Keywords: Volatility spillover index, Currency markets, Equity markets, Economic states, Economic turbulence

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus, Are Volatility Spillovers between Currency and Equity Market Driven by Economic States? Evidence from the US Economy (January 5, 2015). Economics Letters, Vol. 127, 2015, Available at SSRN: https://ssrn.com/abstract=2552510

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

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